Social Security max increases to $94,200 for 2006

By Andrew D. Schwartz, CPA Schwartz & Schwartz, P.C., Woburn, MA

Each year, the government bumps up the maximum social security taxes that you can pay. According to the Social Security Administration (www.ssa.gov), the maximum wage base for 2006 is $94,200, an increase of $4,200 from the 2005 max of $90,000.

At a rate of 6.2%, the maximum social security taxes that your employer will withhold from your salary increases by $260.40, from $5,580.00 in 2005 to $5,840.40 in 2006.

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.

Calculating the Self-employment Tax:

If you're self-employed, you're subject to social security and Medicare taxes as well. Known as the "self-employment tax", you'll need to complete a Schedule SE to calculate this tax, and then report the amount due on page 2 of your Form 1040.

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 of both taxes. Remember, when you work as an employee, your employer matches the social security and Medicare taxes withheld from your pay.

Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes. If you earn income as an employee and as an independent contractor, and your combined income exceeds $90,000 in 2005, 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.

Do You Work For More Than One Employer in 2005 and Earn More Than $90,000?

For 2005, each of your employers will withhold social security taxes from the first $90,000 that you earn from them. If you work for more than one employer and your total salary from all sources exceeds that threshold, you'll have excess social security taxes withheld. Make sure to claim a credit for these excess taxes on your 1040 as additional federal 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 that you should pay through payroll withholdings for 2005 is limited to $5,580.00, the excess of $3,720.00 counts as additional federal income taxes paid in by you.

• A) Social security taxes withheld by Employer #1 $4,650.00
• B) Social security taxes withheld by Employer #2 $4,650.00
• C) Total social security taxes withheld during the year (A+B) $9,300.00
• D) Social security max for 2005 $5,580.00
• E) Excess social security taxes withheld (C-D) $3,720.00

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.

FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:

2006 wage base max: $94,200
2005 wage base max: $90,000
2004 wage base max: $87,900
2003 wage base max: $87,000
2002 wage base max: $84,900
2001 wage base max: $80,400
2000 wage base max: $76,200
1999 wage base max: $72,600
1998 wage base max: $68,400
1997 wage base max: $65,400
1996 wage base max: $62,700
1995 wage base max: $61,200
1994 wage base max: $60,600