Social security taxes are one of the many payroll-related issues employers have to deal with whether they like it or not.
Since 1935, the U.S. social security system has been the largest government-based program in the world (by dollar value). Payments into the system are made through payroll deductions with employers carrying the burden of collection and administration.
Technically, social security tax is part of a broader payroll tax known as FICA. FICA taxes are comprised of social security taxes (12.4%) and Medicare taxes (2.9%) for a total of 15.3% of gross salary. The employer and the employee are each responsible for half (7.65%) of FICA tax, with the exception of self-employed individuals who are responsible for the full 15.3%.
Although FICA and social security taxes generally apply to all wage earners, there are a handful of special circumstances that can affect withholdings. For example, the social security wage base (or earnings cap) can directly impact withholding amounts for high-income employees and wage earners.
What is the earnings cap on social security?
Social security tax can be a substantial liability for some taxpayers. High-earning taxpayers have been critical of the program, arguing that the program limits the amount of return they receive for their contributions to the system.
To mitigate the impact on high earners, lawmakers established something called the Social Security Wage Base (SSWB). The wage base establishes an upper threshold on the amount of income that is subject to the social security portion of FICA tax. Any income that falls above the threshold is not subject to social security tax, although it is still subject to the Medicare portion of FICA.
Each year, Congress evaluates the SSWB and makes adjustments to compensate for rising incomes and other factors. Over the past ten years, the SSWB has increased more than $20,000.
The 2011 Social Security Earnings Threshold
In 2010, the SSWB was set at $106,800. Taxpayers who earned more than this amount were only required to pay social security tax on the portion of their income that fell below this threshold. In 2011, the SSWB is set to remain at $106,800, which is unusual since the threshold has increased several percentage points for each of the previous ten years.
The reasons why the 2011 SSWB is scheduled to remain at the previous level are complex, but may be due to a combination of stagnant salaries and other tax benefits that were passed near the end of the 2010 calendar year.