By Ken Berry
Like clockwork, the Social Security Administration (SSA) announces an increase in the annual Social Security "wage base" practically every October. This year is no exception: Among other changes, the SSA says the wage base will jump from $110,100 in 2012 to $113,700 in 2013. For all the latest information, visit the SSA's Fact Sheet website page.
But that's not the big news. What's actually more important is what the SSA did not announce. Absent any last-ditch legislation from Congress, the rate for the OASDI portion of Social Security or self-employment tax will revert to the levels in effect prior to 2011. That translates to a 2-percent rate jump for virtually everyone who works for a living.
Here's the scoop: The OASDI portion of Social Security or self-employment tax applies to wages or self-employment income up to the specified threshold. The Medicare (HI) portion of the tax applies to all wages or self-employment tax. Previously, the OASDI tax rate was 6.2 percent for employees and self-employed individuals. The rate for the HI portion of the tax was set at 1.45 percent. Both employees and employers must pay these taxes (but self-employed individuals can deduct part of their tax liability).
Initially, Congress authorized a reduction of 2 percent in the OASDI rate to 4.2 percent for employees and self-employeds, but only for the 2011 tax year. The rate remained at 6.2 percent for employers. Then the 2-percent rate reduction for the OASDI tax was extended for the 2012 tax year. The jury is still out on whether another extension will be approved for 2013.
Take the example of an employee earning $100,000 a year. The employee pays an overall employment tax of $5,560 in 2012 (5.65 percent of $100,000). However, if Congress doesn't extend the 2-percent rate reduction in the OASDI portion of the tax, the employee's tax bill will jump to $7,650 in 2013 (7.65 percent of $100,000), even though his or her wages don't exceed the Social Security wage base. This is like getting hit with a hidden tax increase.
The SSA also announced that monthly Social Security and Supplemental Security Income (SSI) benefits for almost 62 million Americans will increase 1.7 percent in 2013. The maximum monthly Social Security benefit for someone who begins collecting benefits at full retirement age will be raised to $2,533 in 2013 (up from $2,513 per month in 2012).
Furthermore, the "earnings test" thresholds for working retirees are being adjusted upward. Social Security recipients who are under full retirement age can earn up to $15,120 in 2013 (up from $14,640 in 2012). At that point, they forfeit $1 of every $2 earned from their benefits. The limit for retirees who reach full retirement age in 2013 is $40,080 (up from $38,880). They forfeit $1 of every $3 earned above this threshold.
Finally, the SSA announced that it is ending payment by paper checks on March 1, 2013. All recipients must receive their payments via direct deposit to a bank or credit union account or have it loaded onto a Direct Express Debit MasterCard. Those who fail to choose an electronic payment option by March 1 will receive payment loaded onto a prepaid debit card.