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Earnings up to $118,500 hit by Social Security FICA tax; revise payroll systems by Jan. 1
Update: Social Security Wage Limit to Remain at $118,500
On Oct. 15, 2015, the Social Security Administration announced that there will be no increase in monthly Social Security benefit payments in 2016, and that the amount of wages subject to Social Security taxes will also remain unchanged at $118,500 in 2016.
See the SHRM Online article Social Security Payroll Tax Threshold Unchanged for 2016.
The article below was last updated on 12/5/2014
High-earning employees will find more of their salary subject to Social Security payroll taxes starting on Jan. 1, 2015.
Based on the increase in average wages, the maximum amount of earnings subject to the Social Security tax (the “taxable maximum”) will increase to $118,500 from $117,000 for 2015, the Social Security Administration (SSA) announced on Oct. 22. Of the estimated 168 million workers who will pay Social Security taxes in 2015, about 10 million will pay higher taxes because of the increase in the taxable maximum, the SSA said.
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.
• The portion of the Social Security FICA tax that employees pay remains unchanged at the 6.2 percent withholding rate up to the taxable maximum.
• Correspondingly, the portion of the tax that employers cover also remains at 6.2 percent of employee wages up to the taxable maximum.
• This amounts to a total Social Security FICA tax of 12.4 percent, paid on income up to $118,500.
Self-employed individuals are responsible for paying the entire 12.4 percent.
With the higher income ceiling, the maximum yearly Society Security tax withholding amount in 2015 rises to $7,347 (6.2 percent withholding on earnings up to $118,500), up from $7,254 (6.2 percent withholding on earnings up to $117,000).
A Social Security fact sheet shows additional adjustments for 2015.
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 Social Security, there is no limit on the amount of earnings (which includes salary and bonus income) subject to the Medicare portion of the tax. This results, for most American wage earners, in a total FICA tax of 15.3 percent (Social Security plus Medicare), half of which is paid by employees and half by employers.
Again, 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).
The SSA also posted additional information about Medicare cost increases for 2015.
FICA Rate (Social Security + Medicare withholding)
Note: The 7.65% tax rate is the combined rate for Social Security and Medicare. The Social Security portion is 6.20% on earnings up to the applicable taxable maximum amount. The Medicare portion is 1.45% on all earnings. The tax rates shown above do not include the additional 0.9 percent Additional Medicare Tax paid by those earning more than $200,000 (discussed below).
For high earners, Medicare takes a somewhat larger bite under a provision of the Affordable Care Act that makes the employee-paid portion of the Medicare FICA tax subject to a 0.9 percentAdditional Medicare Tax on amounts over the statutory threshold. The Additional Medicare Tax should not be confused with the Alternative Minimum Tax on high incomes, which does not involve mandatory payroll withholding.
The threshold annual compensation amounts that trigger the Additional Medicare Tax are:
•$250,000 for married taxpayers who file jointly.
• $125,000 for married taxpayers who file separately.
• $200,000 for single and all other taxpayers.
Additional Medicare Tax withholding applies only to compensation paid to an employee that is in excess of these thresholds in a calendar year. These thresholds are not inflation-adjusted, and thus they apply to more employees each year.
The Additional Medicare Tax raises the wage earner’s portion on compensation above the threshold amounts to 2.35 percent; the employer-paid portion of the Medicare tax on these amounts remains at 1.45 percent.
The IRS has posted responses to frequently asked questions regarding the Additional Medicare Tax.
Although it is not a payroll tax, HR professionals also should be aware of the net investment income tax (NIIT) that high earners must pay when they file their income tax returns. This tax consists of a 3.8 percent surtax on investment income, including capital gains, to be paid by those with modified adjusted gross income above $200,000 (single filers) or $250,000 (joint filers).
Individuals that expect to be subject to the tax should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties.
While the tax bite on employees will be rising, retirees and others who rely on Social Security and Supplemental Security Income (SSI) benefits—nearly 64 million Americans—will see their payments increase by 1.7 percent in 2015 due to the annual cost of living adjustment (COLA), slightly more than the 1.5 percent COLA that took effect in 2014. The Social Security Act governs how the COLA is calculated.
While the standard Federal Unemployment Tax Act (FUTA) rate is 6 percent on the first $7,000 of covered wages, employers generally receive a FUTA credit reduction of 5.4 percent for state unemployment insurance (UI) taxes they pay, reducing the FUTA rate for most employers to 0.6 percent of wages paid up to a limit of $7,000 per worker, or $42 per employee per year. However, states that have outstanding federal UI loan balances are subject to reduced tax credits, resulting in higher FUTA taxes for employers in those states.
The Department of Labor announced that employers will be subject to an increased FUTA tax rate in January 2015 based on FUTA taxable wages paid during 2014 in these affected states: California, Connecticut, Indiana, Kentucky, New York, North Carolina, Ohio and the Virgin Islands.
The FUTA tax liability for 2014 is not due or reportable until Jan. 31, 2015, the filing date for the 2014 Form 940.
The IRS issued Revenue Procedure 2014-61 on Oct. 30, 2014, with annual inflation adjustments for more than 40 tax provisions, including tax rates and income ranges for singles, married (filing jointly), married (filing separately), and heads of households, among others. (For 2016 tax brackets, see 2016 Income Tax Rates and Ranges.)
2015 Tax Rates: Single Filing Individual Return
If Taxable Income Is:
The Tax Rate Is:
Not over $9,225
10% of taxable income
Over $9,225 but not over $37,450
$922.50 plus 15% of the excess over $9,225
Over $37,450 but not over $90,750
$5,156.25 plus 25% of the excess over $37,450
Over $90,750 but not over $189,300
$18,481.25 plus 28% of the excess over $90,750
Over $189,300 but not over $411,500
$46,075.25 plus 33% of the excess over $189,300
Over $411,500 but not over $413,200
$119,401.25 plus 35% of the excess over $411,500
$119,996.25 plus 39.6% of the excess over $413,200
Source: IRS, Revenue Procedure 2014-61
2015 Tax Rates: Married Filing Joint Return
Not over $18,450
Over $18,450 but not over $74,900
$1,845 plus 15% of the excess over $18,450
Over $74,900 but not over $151,200
$10,312.50 plus 25% of the excess over $74,900
Over $151,200 but not over $230,450
$29,387.50 plus 28% of the excess over $151,200
Over $230,450 but not over $411,500
$51,577.50 plus 33% of the excess over $230,450
Over $411,500 but not over $464,850
$111.324 plus 35% of the excess over $411,500
$129,996.50 plus 39.6% of the excess over $464,850
2015 Tax Rates: Married Filing Separate Returns
Over $37,450 but not over $75,600
Over $75,600 but not over $115,225
$14,693.75 plus 28% of the excess over $75,600
Over $115,225 but not over $205,750
$25,788.75 plus 33% of the excess over $115,225
Over $205,750 but not over $232,425
$55,662 plus 35% of the excess over $205,750
$64,989.25 plus 39.6% of the excess over $232,425
2015 Tax Rates: Heads of Households
Not over $13,150
Over $13,150 but not over $50,200
$1,315 plus 15% of the excess over $13,150
Over $50,200 but not over $129,600
$6,872.50 plus 25% of the excess over $50,200
Over $129,600 but not over $209,850
$26,722.50 plus 28% of the excess over $129,600
Over $209,850 but not over $411,500
$49,192.50 plus 33% of the excess over $209,850
Over $411,500 but not over $439,000
$115,737 plus 35% of the excess over $411,500
$125,362 plus 39.6% of the excess over $439,000
Revenue Procedure 2014-61 included these additional tax provisions, among others:
• The standard deduction rises to $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively, for tax year 2014. The standard deduction for heads of household rises to $9,250, up from $9,100.
• The limitation for itemized deductions to be claimed on tax year 2015 returns of individuals begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).
• The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly). It phases out completely at $380,750 ($432,400 for married couples filing jointly.)
• The Alternative Minimum Tax exemption amount for tax year 2015 is $53,600 ($83,400, for married couples filing jointly). The 2014 exemption amount was $52,800 ($82,100 for married couples filing jointly).
• The 2015 maximum Earned Income Credit amount is $6,242 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,143 for tax year 2014. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.
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