FICA Taxes Will Barely Increase for High Earners in 2004

Highly paid wage earners may scarcely notice the projected increase in the wage base on which Social Security taxes are due for 2004, according to recently released government figures. The 2004 wage base of $87,900 is a mere $900 higher than the 2003 amount, and the maximum additional tax that might be collected on someone earning above the 2003 wage base is only $55.80.

The tax increase will show up in the amount of FICA (Federal Insurance Contribution Act) tax deducted next year from the paychecks of those earning above the 2003 wage base.

Although the tax rate for the Old Age, Survivors and Disability Insurance (OASDI) portion of FICA has held steady at 6.2 percent since 1990, the amount of wages subject to the tax can, and usually does, increase each year, based on a national wage index. The taxes paid by employees are matched by identical amounts paid by employers into the Social Security system.

The tax rate for the "Hospital Insurance," or Medicare, portion of FICA is 1.45 percent, and it applies to every dollar of earnings; there is no cap. This amount also is matched by employers.

Avram Sacks, JD, Social Security analyst with CCH, noted that taxes for self-employed individuals use the same earnings base, but the rates are double those of employees, since the self-employed must also pay the "employer" portion of the taxes.

"This means that high-earning, self-employed individuals may owe as much as $111.60 in additional self-employment tax in 2004," Sacks said. "However, they can recoup some of this amount through a deduction on their federal income tax."

About 9.2 million workers will be affected by the higher wage base in 2004.

According to Sacks, this change in the cap will have consequences on future revenues and benefits: "The wage base also is a benefits base. Only earnings up to the wage base are considered in calculating Social Security benefits. As a result, those who pay less now should receive less later. Some private pensions also use the amount of 'covered compensation'--that is, compensation up to the wage base--in calculating their benefits as well."

Increase Less Than Estimated

The wage base for 2004 is $300 less than the lowest estimated increase published in the 2003 Annual Report of the Board of Trustees of the Federal Old-Age, Survivors and Disability Insurance (OASDI) Trust Funds issued earlier this year in March. The 2004 wage base is based on the computed increase in national average wages for 2002. The 2002 national average wage index of $33,252.09 is 1 percent higher than the 2001 national average wage index.

"This is less than the 1.5-percent increase predicted in even the most conservative scenario by the Social Security trustees in their March report," Sacks noted.

Domestic Workers

For 2004, there will be no increase in the amount of wages a domestic worker can earn without being subject to FICA taxes. You can pay a domestic worker, such as a maid or nanny, up to $1,400 in 2004 without having to wrestle with federal withholding on wages.

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Analysis of Bush's 2003 Tax Cut Proposal

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Posted September 22, 2003.