2016 Payroll Tax Unchanged; Tax Brackets Nudge Up

Wages subject to Social Security FICA stay at $118,500; income tax ranges adjusted higher

By Stephen Miller, CEBS Oct 15, 2015
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updated 10/30/2015

HR professionals won’t have to adjust their payroll tax systems next year for a Social Security FICA increase, as the amount of earned income subject to Social Security taxes won’t change, given the absence of inflation in recent months.

But the modest amount of inflation this year was enough to cause small upward adjustments in tax filers’ income tax brackets for 2016.

On Oct. 15, the Social Security Administration (SSA) announced that there will be no increase in monthly Social Security benefits in 2016, and that the maximum amount of wages subject to Social Security taxes will also remain unchanged at $118,500. Earnings above this amount are not subject to the Social Seucrity portion of the payroll tax or used to calculate retirement payouts.

Social Security is financed by a 12.4 percent tax on wages up to the annual threshold, with half (6.2 percent) paid by workers and the other half paid by employers. This taxable wage base usually goes up each year—it rose from $117,000 in 2014 to $118,500 in 2015.

The annual Social Security cost of living adjustment (COLA) is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a broad measure of consumer prices generated by the Bureau of Labor Statistics. The COLA is calculated by comparing consumer prices in July, August and September each year with prices in the same three months from the previous year.

“Each year, Social Security calculates the automatic cost-of-living adjustment, if any, that our program beneficiaries will receive the following year. For years when there is a Social Security COLA, this adjustment is intended to keep inflation from eroding the purchasing power of Social Security and Supplemental Security Income benefits,” explained J. Jioni Palmer, associate commissioner for external affairs at the SSA. “Because the CPI-W has not increased, there will be no COLA for 2016.”

He added, “Since there is no COLA, the statute also prohibits a change in the maximum amount of earnings subject to the Social Security tax, as well as the retirement earnings test exempt amounts.”

“The calculation is automatic. It goes strictly by inflation,” said Harry Sit, CEBS, who writes and blogs on financial matters. “You get a higher COLA only if inflation is higher.”

Typically, by Jan. 1 each year, U.S. employers must adjust their payroll systems to account for the higher taxable wage base under the Social Security payroll tax, and notify highly compensated employees affected by the change that more of their paychecks will be subject to the tax. For 2016, that’s one task less for overburdened HR staff and payroll administrators.

FICA Rates Set by Law

Social Security and Medicare payroll taxes are collected together as the Federal Insurance Contributions Act (FICA) tax. FICA tax rates are statutorily set, and therefore require new tax legislation to be changed.

For employees, the Medicare payroll tax rate is 1.45 percent on all earnings, bringing the combined Social Security and Medicare payroll tax for employees to 7.65 percent—with only the Social Security portion limited to the $118,500 earned-income threshold.

Employers also pay a matching 1.45 percent of wages to Medicaid, while those who are self-employed must pay both the employer and employee portions of FICA taxes.

FICA Rate

(Social Security + Medicare withholding)

2015

2016

Employee

7.65%

7.65%

Employer

7.65%

7.65%

Self-Employed

15.30%

15.30%

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.

Source: Social Security Administration

Earnings Limit Unchanged

The annual earnings limit for those who both work and claim Social Security benefits will stay at $15,720 in 2016 for individuals who opt to receive benefits early (ages 62 through 65). For those who turn 66 in 2016, the earning limit remains at $41,880. A brochure posted on the SSA website describes the extent to which benefits are reduced for excess earnings above these limits.

Additional Medicare Tax

For highly compensated employees, Medicare takes a 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 percent Additional Medicare Tax on amounts over a statutory threshold. 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 employee compensation in excess of these thresholds in a calendar year. These thresholds are not inflation-adjusted, and thus they apply to more employees each year.

This added 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 Additional Medicare Tax should not be confused with the Alternative Minimum Tax on high incomes, which does not involve mandatory payroll withholding.

2016 Income Tax Rates and Ranges

The IRS issued Revenue Procedure 2015-53 at the end of October 2015, with annual inflation adjustments for income tax provisions including 2016 taxable income ranges for singles, married (filing jointly), married (filing separately), and heads of households.

While there was no statutory increase in tax rates for 2016, the modest CPI increase did nudge income tax brackets slightly upward, which could mean lower taxes for employees whose income stayed flat. (For a look back at 2015 tax brackets, see 2015 Income Tax Rates and Ranges.)

2016 Tax Rates: Single Filing Individual Return

(other than surviving spouses and unmarried heads of households)

If Taxable Income Is:

The Tax Rate Is:

Not over $9,275

10% of taxable income

Over $9,275 but not over $37,650

$927.50 plus 15% of the excess over $9,275

Over $37,650 but not over $91,150

$5,183.75 plus 25% of the excess over $37,650

Over $91,150 but not over $190,150

$18,558.75 plus 28% of the excess over $91,150

Over $190,150 but not over $413,350

$46,278.75 plus 33% of the excess over $190,150

Over $413,350 but not over $415,050

$119,934.75 plus 35% of the excess over $413,350

Over $415,050

$120,529.75 plus 39.6% of the excess over $415,050

Source: IRS, Revenue Procedure 2015-53

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2016 Tax Rates: Married Filing Joint Return

If Taxable Income Is:

The Tax Rate Is:

Not over $18,550

10% of taxable income

Over $18,550 but not over $75,300

$1,855 plus 15% of the excess over $18,550

Over $75,300 but not over $151,900

$10,367.50 plus 25% of the excess over $75,300

Over $151,900 but not over $231,450

$29,517.50 plus 28% of the excess over $151,900

Over $231,450 but not over $413,350

$51,791.50 plus 33% of the excess over $231,450

Over $413,500 but not over $466,950

$111,818.50 plus 35% of the excess over $413,350

Over $466,950

$130,578.50 plus 39.6% of the excess over $466,950

Source: IRS, Revenue Procedure 2015-53

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2015 Tax Rates: Married Filing Separate Returns

If Taxable Income Is:

The Tax Rate Is:

Not over $9,275

10% of taxable income

Over $9,275 but not over $37,650

$927.50 plus 15% of the excess over $9,275

Over $37,650 but not over $75,950

$5,183.75 plus 25% of the excess over $37,650

Over $75,950 but not over $115,725

$14,758.75 plus 28% of the excess over $75,950

Over $115,725 but not over $206,675

$25,895.75 plus 33% of the excess over $115,725

Over $206,675 but not over $233,475

$55,909.25 plus 35% of the excess over $206,675

Over $233,475

$65,289.25 plus 39.6% of the excess over $233,475

Source: IRS, Revenue Procedure 2015-53

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2015 Tax Rates: Heads of Households

If Taxable Income Is:

The Tax Rate Is:

Not over $13,250

10% of taxable income

Over $13,250 but not over $50,400

$1,325 plus 15% of the excess over $13,250

Over $50,400 but not over $130,150

$6,897.50 plus 25% of the excess over $50,400

Over $130,150 but not over $210,800

$26,835 plus 28% of the excess over $130,150

Over $210,800 but not over $413,350

$49,417 plus 33% of the excess over $210,800

Over $413,350 but not over $441,000

$116,258.50 plus 35% of the excess over $413,350

Over $441,000

$125,936 plus 39.6% of the excess over $441,000

Source: IRS, Revenue Procedure 2015-53

Standard Deduction

For taxable years beginning in 2016, the standard deduction amounts are:

Unmarried individuals (other than surviving spouses and heads of households): $6,300

Married couples filing joint returns and surviving spouses: $12,600

Heads of households: $9,300

Married Individuals filing separate returns: $6,300

Itemized Deductions Limit

The limit for itemized deductions that can be claimed on tax year 2016 returns are:

Unmarried individuals: $259,400.

Married couples filing jointly or surviving spouses: $311,300

Heads of households: $285,350

Married individuals filing separate returns: $155,650

Personal Exemption

The personal exemption for tax year 2016 is $4,050. The adjusted gross incomes phase-out range begins and ends as follows:

Unmarried individuals: $259,400 to $381,900

Married couples filing jointly or surviving spouses: $311,300 to $433,800

Heads of households: $285,350 to $407,850

Married individuals filing separate returns: $155,650 to $216,900

Earned Income Credit

For the 2016 earned income credit, Revenue Procedure 2015-53 has a table providing maximum income limits and credit amounts, along with phase-out thresholds, by filing categories and numbers of qualifying children.

For example, the maximum earned income credit amount is $6,269 for taxpayers filing jointly who have 3 or more qualifying children, phasing out completely when adjusted gross income (or, if greater, earned income) reaches $53,505.

Alternative Minimum Tax

For taxable years beginning in 2016, the exemption amounts are:

Unmarried individuals: $53,900

Married couples filing jointly or surviving spouses: $83,800

Married individuals filing separate returns: $41,900

The excess taxable income above which the 28 percent tax rate applies is:

Married individuals filing separate returns: $93,150

Joint returns and unmarried individuals (other than surviving spouses): $186,300

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

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