For the first time since Congress enacted automatic Cost-of-Living Adjustments (COLA) for Social Security back in 1975, there will be no increase to the Social Security Wage Base. This annual calculation is based on whether there "is an increase in the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), from the third quarter of the last year to the corresponding period of the current year. This year there was no increase in the CPI-W from the third quarter of 2008 to the third quarter of 2009," according to the Social Secuirty Administration.
"At a rate of 6.2%, the maximum social security taxes that your employer will withhold from your salary remains at $6,622 for 2010. In addition, your employer also withholds Medicare taxes from your pay at a rate of 1.45%. There is no limit on your wages subject to this tax," says Andrew Schwartz CPA, founder of FindAGoodCPA.com (www.FindAGoodCPA.com), a site where taxpayers can locate a CPA in their metropolitan area based on the CPA’s specialty.
Calculating the Self-employment Tax
People who are self-employed are subject to social security and Medicare taxes as well. Known as the self-employment tax, anyone with more than $400 of net self-employment income will need to complete and attach a Schedule SE to their income tax return to calculate this tax.
The self-employment tax is based on a social security tax rate of 12.4% and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee's portion and the employer's portion for each of these taxes. Remember, employers are required to match the social security and Medicare taxes withheld from their employees’ pay.
"Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes," says Schwartz. "If you earn income as an employee and as an independent contractor, and your combined income exceeds $106,800 in 2009, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and you'll end up overpaying your self-employment taxes."
If You Work For More Than One Employer and Earn More Than $106,800
For 2009, employers will withhold social security taxes from the first $106,800 earned by each of their employees. Anyone who works for more than one employer and earns more than $106,800 in social security wages will have excess social security taxes withheld, and will be able to claim a credit for these excess taxes on their 1040 as additional federal income taxes paid in.
For Example
Let’s say you work for two employers and earn $75,000 from each employer. Employer #1 will withhold $4,650 in social security taxes ($75,000 * 6.2%). Employer #2 will also withhold $4,650 in social security taxes – for a total of $9,300 in social security taxes withheld during the year. Since the maximum social security taxes for 2009 is limited to $6,622, the excess of $2,678 counts as additional federal income taxes paid in by you.
A) Social security taxes withheld by Employer #1 $4,650
B) Social security taxes withheld by Employer #2 $4,650
C) Total social security taxes withheld during the year (A+B) $9,300
D) Social security max for 2009 $6,622
E) Excess social security taxes withheld (C-D) $2,678
Website Resources
"A great place to find out more about your social security taxes and projected benefits is at the Social Security Administration's website located at www.ssa.gov. For the very latest tax and basic financial planning information, visit www.FindAGoodCPA.com," says Schwartz.
About Andrew D. Schwartz CPA
Andrew D. Schwartz, CPA is the editor and founder of www.FindAGoodCPA.com, a site where taxpayers can locate and interact with CPAs in their metropolitan area based on the professional's specialty. Schwartz has provided tax and basic financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal. He is available for interviews.
