Social Security Taxes Increase -- Slightly for 2005

TAX ADVICE from Julian Block

(March 7, 2005) The Social Security Administration says that about 9.9 million workers are going to be dunned for an additional $130.20 in Social Security taxes during 2005. Their employers also match those payroll taxes. This is caused by a slight increase in the maximum amount of wages subject to FICA (short for Federal Insurance Contributions Act) taxes, levies that are better known as Social Security taxes. The tax hike shows up in the amount of FICA withholdings from paychecks of those with wages above the wage base.

Unable to recall continuous media coverage of President Bush approving the decision by an election-year, closely divided Congress to risk voter wrath and boost the wage base? The rise rated scant attention because back in the mid-1970s, Congress enacted legislation authorizing the adjustment to kick in automatically. The calculation is based on changes in the CPI, short for Consumer Price Index, a government formula that measures inflation, from the third quarter of one year to the corresponding quarter of the next.

There’s been no change in the 7.65 FICA tax rate for both employees and employers. But the latest CPI-mandated increase of $2,100 (from a maximum of $87,900 for 2004 to $90,000 for 2005) in the wage base for the 6.20 percent Social Security benefits tax triggered an increase of up to $130.20 ($2,100 times 6.20).

Some other numbers need to be crunched to explain why higher-paid earners are nicked for even more taxes. The 7.65 percent FICA tax consists of two components with different rates of: (1) 6.20 percent for the Social Security benefits portion, the old age, survivors, and disability insurance fund; and (2) 1.45 percent for the Medicare fund, the federal hospital insurance program for the elderly.

In 1993, Congress decided to do away with the cap on Medicare's wage base. That is why withholding for Social Security during 2005 stops at $90,000, whereas above-$90,000 earners must pay Medicare taxes on every dollar of their salaries, wages, bonuses, commissions, vacation pay, etc.

To illustrate the interplay of these numbers, assume Larchmonter J.P. earns $90,000 for 2004 and again for 2005. J.P.’s tab for Social Security tax: $5,580.00 for 2005, up by $130.20 from $5,449.80 for 2004. Put another way, take-home pay drops by $130.20 for J.P. or anyone else with wages above $90,000, including her spouse, assuming she had the forethought to select a mate with sufficiently high earnings.

Once her wages for 2005 surpass $90,000, J.P. can forget about the 6.20 percent tax, though she still has to reckon with the 1.45 percent tax. For each $1,000 above $90,000, she forfeits $14.50 ($1,000 times1.45 percent) to Medicare taxes.

For 2005, workers with earnings above $384,828 are assessed a Medicare tax that surpasses the top Social Security tax of $5,580. Going in the other direction, the earned-income tax credit lessens the FICA burden for low-wage workers.

The wage base has gone up every year since 1971, when the figure was $7,800; back then, the maximum Social Security tax was $405.60. Things have indeed come a long, expensive way since FICA taxes started in 1937, when the tax was capped at $30 for both employer and employee (1 percent of the first $3,000 of earnings). For some years, FICA taxes have exacted a bigger bite than federal income taxes for many middle-income earners.

Julian Block lives in Larchmont and is a syndicated columnist, attorney and former IRS investigator who the New York Times has called “a leading tax professional.” His “Year Round Tax Savings” shows how to save big money on taxes – legally. To purchase a copy or for information about his adult ed courses on tax strategies, email: at julianblock@yahoo.com.

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