For High Earners, FICA Taxes Increase in 2007

RIVERWOODS, Ill., Oct. 23 /PRNewswire/ -- Highly-paid wage earners will see a moderate increase in the wage base on which Social Security taxes are due for 2007, according to CCH, a leading provider of tax and payroll information and software (hr.cch.com). The 2007 wage base of $97,500 is $3,300 higher than the 2006 amount, and the maximum additional Social Security tax that might be collected on someone earning above the 2006 wage base is $204.60. This is the second largest increase since 2002 in both dollars and in percentage, and reflects the second largest increase in national average wages since 2000.

The tax increase will show up in the amount of FICA (Federal Insurance Contribution Act) tax deducted next year from the paychecks of those earning above the 2006 wage base. Although the tax rate for the Old-Age, Survivors and Disability Insurance (OASDI) portion of FICA has held steady at 6.2 percent since 1990, the amount of wages subject to the tax can, and usually does, increase each year, based on a national wage index. The taxes paid by employees are matched by identical amounts paid by employers into the Social Security system.

The tax rate for the "Hospital Insurance," or Medicare, portion of FICA is 1.45 percent, and it applies to every dollar of earnings. This amount also is matched by employers.

"Taxes for self-employed individuals use the same earnings base, but the rates are double those of employees, since the self-employed must also pay the 'employer' portion of the taxes," said Avram Sacks, JD, CCH Social Security law analyst.

"This means that high-earning, self-employed individuals may owe as much as $409.20 in additional self-employment tax in 2007," Sacks said. "However, they can recoup some of this amount through a deduction on their federal income tax."

About 11 million workers will be affected by the higher wage base in 2007.

Increase Less Than Estimated

The wage base for 2007 is $900 less than the highest estimated increase published in the 2006 Annual Report of the Board of Trustees of the Federal OASDI Trust Funds issued in May of this year. The 2007 wage base reflects national average wages for 2005, the variable upon which the 2007 wage base formula is based. The 2005 national average wage index of $36,952.94 is 3.5 percent higher than the 2004 national average wage index, and is the second highest increase since 2000.

"This is about 1 percent less than the increase predicted in two of the three scenarios presented by the Social Security trustees in their May report," Sacks noted.

Consequences for Revenues, Benefits

"The wage base also is a benefits base," Sacks noted. "Only earnings up to the wage base are considered in calculating Social Security benefits. As a result, those who pay more now should receive more later. Some private pensions also use the amount of covered compensation -- that is, compensation up to the wage base -- in calculating their benefits as well."

Domestic Workers

There will be no increase next year in the amount of wages a domestic worker can earn without being subject to FICA taxes. In 2007, you can pay a domestic worker, such as a maid or nanny, up to $1,500 without having to wrestle with federal withholding on wages.

About Wolters Kluwer Law & Business

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