Things you should know about the Social Security tax but probably don’t.
While you hear a lot
about the federal income tax, you don’t hear much about the Social
Security tax. That’s odd because it’s just as expensive as the federal
income tax for many folks, especially the self-employed. Here are five
apparently little-known truths about how the Social Security tax works
and how much it can amount to.
1. Social Security tax can be a big number if you’re an employee
As an employee, your wages are hit with the 12.4% Social Security tax up to the annual wage ceiling. Half the Social Security tax bill (equal to 6.2%) is withheld from your paychecks. The other half (also 6.2%) is paid by your employer, so you never actually see that half. Unless you understand how the tax works and closely examine your pay stubs, you may be blissfully unaware of how much the Social Security tax actually costs.
The Social Security tax wage ceiling for 2013 is $113,700, and it rises to $117,000 next year. If your wages meet or exceed the ceiling for 2013, the Social Security tax hit for this year is a whopping $14,099 (12.4% x $113,700 = $14,099). Once again, half of that will come out of your paychecks, and your employer will pay the other half.
If your wages meet or exceed the ceiling for 2014, the Social Security tax hit for next year will be an even-more-whopping $14,508 (12.4% x $117,000 = $14,099).
2. It can be an even bigger number if you’re self-employed
While many employees may be blissfully unaware of the full magnitude of the Social Security tax, because they only pay half the bill, self-employed folks (sole proprietors, partners, and LLC members) know the unmitigated truth all too well. That’s because the self-employed must pay the entire 12.4% Social Security tax hit out of their own pockets, based on their net self-employment income. The fact that companies don’t owe any Social Security tax on amounts paid to independent contractors is a big reason why they often prefer to engage independent contractors instead of hiring employees.
For 2013, the Social Security tax self-employment income ceiling is $113,700 (same as the wage ceiling for employees). So if your self-employment income for this year is $113,700 or more, you owe the $14,099 maximum Social Security tax hit (12.4% x $113,700 = $13,243).
For 2014, the Social Security tax self-employment income ceiling is $117,000 (same as the wage ceiling for employees). So if your self-employment income for next year is $117,000 or more, you will owe the $14,508 maximum Social Security tax hit (12.4% x $117,000 = $14,508).
3. There’s a disconnect between Social Security tax and benefits
While the Social Security tax ceiling increased by 2.9% from 2013 to 2014, recipients’ benefits only increased by 1.5%. This strange phenomenon has occurred in many years and it’s just one more thing to not like about the Social Security tax.
4. The tax ceiling keeps going up
The Social Security Administration’s latest projections (issued in June of this year) for the Social Security tax ceilings for 2015 and beyond are listed below. However, the actual ceilings will probably be higher because the number for 2014 was already underestimated by $1,500. Here are the projected ceilings.
5. There’s no account with your name on it and insolvency is looming
Some people think the government has set up an account with their name on it to hold the money to pay for their future Social Security benefits. After all, that must be where all the Social Security taxes on people’s wages and self-employment income go. Right? Wrong! There are no individual accounts. All you actually have is a promise from the government, for what it’s worth.
Meanwhile, the Social Security Administration’s most recent report on the system’s financial status (dated May 31, 2013) projects insolvency in 2033. In that year, the program is projected to only have enough revenue from the Social Security tax to pay about 77% of the promised benefits, and the percentage will continue to fall in later years. (Source: Congressional Research Service study dated Oct. 10, 2013.) If you think Obamacare is a political quagmire, just wait until the politicians are forced to get serious about fixing Social Security.
The Bottom Line
It’s
not a pretty picture. The Social Security tax hit on many folks will
continue to go up (maybe way up), and the odds of actually receiving the
benefits you’ve been promised are diminishing. The truth hurts.
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