While the typical U.S. employee may expect to earn a bit more in 2014, high earners will find that more of their salary is subject to Social Security payroll taxes. And since income thresholds are not inflation adjusted for the Additional Medicare Tax on high earners, more employees will pay this extra levy as well.
On Oct. 30, 2013, the Social Security Administration (SSA) announced that the maximum amount of earnings subject to the Social Security payroll tax will increase to $117,000 from $113,700, beginning Jan. 1, 2014. Of the estimated 165 million U.S. workers who will pay Social Security payroll taxes in 2014, about 10 million will pay a higher amount as a result of the inflation-based increase in wages subject to Social Security withholding.
Social Security and Medicare payroll withholding are collected together as the Federal Insurance Contributions Act (FICA) tax.
By Jan. 1, U.S. employers should:
- Adjust their payroll systems to account for the higher taxable maximum under the Social Security portion of FICA.
- Notify affected employees that more of their paychecks will be subject to FICA.
Withholding Rates Unchanged
The portion of the Social Security FICA tax that employees pay remains unchanged at the 6.2 percent withholding rate. Correspondingly, the portion of the tax that employers cover also remains at 6.2 percent of employee wages. This amounts to a total Social Security FICA tax of 12.4 percent.
These rates are set by statute and are not adjusted annually based on inflation. Except for a temporary 2 percent cut in the employee portion of the Social Security payroll-tax rate, which took effect in 2011 and ended in January 2013, they have been in place since 1990.
The IRS will issue payroll withholding tables for 2014, which will be available at www.IRS.gov.
In 2014, with the higher income ceiling, the maximum yearly Social Security tax withholding amount rises to $7,254 (6.2 percent withholding on earnings of up to $117,000), up from $7,049.40 (6.2 percent withholding on earnings of up to $113,700).
For most Americans, the Medicare portion of the FICA tax remains at 2.9 percent, of which half (1.45 percent) is paid by employees and half by employers. Unlike Society Security, there is no limit on the amount of wages subject to the Medicare portion of the tax. This results in a total FICA tax for most wage earners of 15.3 percent (Social Security plus Medicare), half of which is paid by employees and half by employers.
Self-employed individuals are responsible for the entire FICA tax rate of 15.3 percent (12.4 percent Social Security plus 2.9 percent Medicare).
For high earners, Medicare takes a somewhat larger bite, under a provision of the Patient Protection and Affordable Care Act. Beginning in 2013, the employee-paid portion of the Medicare FICA tax became subject to the 0.9 percent Additional Medicare Tax. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately, and $200,000 for single and all other taxpayers. These wage thresholds are not inflation adjusted, and thus apply to more employees each year.
An employer must withhold the Additional Medicare Tax from the wages or compensation it pays to an employee in excess of $200,000 in a calendar year.
The Additional Medicare Tax raised the individual wage earner’s portion on compensation above the threshold amounts to 2.35 percent from 1.45 percent; the employer-paid portion of the Medicare tax on these amounts remained at 1.45 percent.
Benefits Adjust, Too
The SSA also announced that the annual cost-of-living adjustment (COLA) for monthly Social Security and Supplemental Security Income benefits paid to nearly 63 million Americans will increase 1.5 percent in 2014, slightly less than the 1.7 percent COLA that took effect in 2013.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Other 2014 Benefit Change Articles:
For 2014, IRS Issues 401(k) and Pension Plan Limits, SHRM Online Benefits, November 2013
For 2014, Higher Limits for HSA Contributions, SHRM Online Benefits, May 2013
Related SHRM Article:
Additional Medicare Tax on High Earners Poses Challenges, SHRM Online Benefits, July 2012
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