For Top Earners, Payroll Tax Takes Bigger Bite Next Year
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 2001 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. 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 $558 in additional self-employment tax in 2002," Sacks said. "However, they can recoup some of this amount through a deduction on their federal income tax."
About 10.5 million workers will be affected by the higher wage base in 2002.
"The wage base also is a benefits base," Sacks noted. "Only earnings up to the wage base are considered in calculating Social Security benefits. As a result, those who pay more now should receive more 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."
Domestic WorkersFor 2002, 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 $1,300 in 2002 without having to wrestle with federal withholding on wages.
MARY DALE WALTERS
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CCH INCORPORATED, Riverwoods, Ill., is a leading provider of health and human resources information, including Payroll Management Guide, Pension Plan Guide, Employee Benefits Management, Social Security Reporter and Unemployment Insurance Reports. CCH also provides tax and business law information in print and electronic form for accounting, legal and health care professionals. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at www.cch.com and the CCH Human Resources site is http://hr.cch.com .