Woburn, MA (PRWEB) October 19, 2006
Each year, the government bumps up the maximum social security taxes that a person can pay. For 2007, the maximum wage base jumps to $97,500, an increase of $3,300 over the 2006 max of $94,200.
The Social Security Administration predicts that 11 million individuals will end up paying higher taxes due to this increase, out of the estimated 163 million workers who will pay social security taxes next year.
“At a rate of 6.2%, the maximum social security taxes that your employer will withhold from your salary increases by $204.60, from $5,840.40 in 2006 to $6,045.00 in 2007. In addition, your employer also withholds Medicare taxes from your pay at a rate of 1.45%. There is no limit on your wages subject to this tax,” said Andrew Schwartz CPA, founder of FindAGoodCPA.com (http://www.FindAGoodCPA.com), a site where taxpayers can locate a CPA in their metropolitan area based on the CPA’s specialty.
Calculating the Self-employment Tax
People who are self-employed are subject to social security and Medicare taxes as well. Known as the self-employment tax, anyone with more than $400 of net self-employment income will need to complete and attach a Schedule SE to their income tax return to calculate this tax.
The self-employment tax is based on a social security tax rate of 12.4% and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee's portion and the employer's portion for each of these taxes. Remember, employers are required to match the social security and Medicare taxes withheld from their employees’ pay.
”Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes,” said Schwartz. “If you earn income as an employee and as an independent contractor, and your combined income exceeds $94,200 in 2006, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and you'll end up overpaying your self-employment taxes.”
If You Work For More Than One Employer and Earn More Than $94,200
For 2006, employers will withhold social security taxes from the first $94,200 earned by each of their employees. Anyone who works for more than one employer and earns more than $94,200 in social security wages will have excess social security taxes withheld, and will be able to claim a credit for these excess taxes on their 1040 as additional federal income taxes paid in.
Let’s say you work for two employers and earn $75,000 from each employer. Employer #1 will withhold $4,650 in social security taxes ($75,000 * 6.2%). Employer #2 will also withhold $4,650 in social security taxes – for a total of $9,300 in social security taxes withheld during the year. Since the maximum social security taxes for 2006 is limited to $5,840.40, the excess of $3,459.60 counts as additional federal income taxes paid in by you.
A) Social security taxes withheld by Employer #1 $4,650.00
B) Social security taxes withheld by Employer #2 $4,650.00
C) Total social security taxes withheld during the year (A+B) $9,300.00
D) Social security max for 2006 $5,840.40
E) Excess social security taxes withheld (C-D) $3,459.60
”A great place to find out more about your social security taxes and projected benefits is at the Social Security Administration's website located at http://www.ssa.gov. For the very latest tax and basic financial planning information, visit http://www.FindAGoodCPA.com,” said Schwartz.
About Andrew D. Schwartz CPA
Andrew D. Schwartz, CPA is the editor and founder of http://www.FindAGoodCPA.com, a site where taxpayers can interact with CPAs who specialize in a variety of niches such as healthcare, real estate professionals, and lawyers. Schwartz has provided tax and basic financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal. He is available for interviews.