As discussed in ‘Congress Expected to Extend Payroll Tax Holiday into 2012’ there is quite a debate going on in Congress right now regarding Social Security. While the main question is whether to extend the Social Security tax cut, an underlying question is how to keep Social Security solvent.
Every year, Congress waits until the last minute to pass important tax legislation, often times passing legislation all the way up to the last day of the year.
This year the hold up is the payroll tax holiday. Initially intended to be for 2011 only, the slower than expected growth of the US economy has caused fears that allowing the tax cut to expire could cause the economy to stall or even go back into recession.
Surprisingly, both Democrats and Republicans are in favor of extending the tax cut. Not surprisingly, the two parties can’t agree on the details.
The biggest concern for those who oppose extending the payroll tax cut is the harm it will do to Social Security.
Eliminate the Wage Base to Keep Social Security Solvent
One of the proposed solutions is to get rid of the social security wage base. This is the maximum income that employees (and employers) have to pay Social Security tax on.
In 2011 the Social Security wage base is $106,800; in 2012 it is set to go up to $110,100. That means that people who earn over $106,800 don’t have to pay Social Security taxes on the excess above the wage base. For example, if you earn $120,000 in 2011, you will pay $4,485.60 in Social Security taxes, which is 4.2% of $106,800; if you earn $200,000 or $500,000 or even $1 million dollars, you will still only pay $4,485.60 in Social Security taxes.
There is no wage base for Medicare taxes, so employees pay 1.45% on their earnings regardless of how high they are.
It will be interesting to see how the payroll tax holiday will play out and if the Social Security wage base remains the same, is eliminated or possibly raised before the year ends.
2012 Social Security Wage Base
As BradStreetBlogger reminds us, if you’re lucky enough to be at the top of the wage base, your taxes will go up in 2012:
For the first time since 2009 the earnings subject to Social Security is going up. In 2009 and 2010, the first $106,800 in earnings was subject to this 6.20% tax (12.40% if self-employed).
In 2011, the wage base was also $106,800 but the tax rate was reduced from 6.20% to 4.20% (10.40% if self-employed). In 2012, the wage base increases to $110,100.
On February 17, Congress extended the 2% payroll tax cut for the remainder of 2012 (previously only a 2-month extension was granted, leaving payroll companies, employers, and employees up in the air as to how much tax they would pay in 2012). This means that taxpayers who earn $110,100 or more will pay $4,624.20 in Social Security taxes (4.2%) in 2012. Medicare taxes are untapped, so everyone pays 1.45% on their entire earnings, regardless of how high.