- The Washington Times - Wednesday, February 8, 2006

Each year, there is an increase in the maximum amount of wages subject to FICA, Federal Insurance Contribution Act taxes.

FICA taxes are better known as Social Security taxes. These payroll taxes also are matched by employers.

The Social Security Administration says that during 2006 about 11.3 million workers are going to be dunned for additional FICA taxes of as much as $260.40.

That’s because the maximum amount of wages subject to the 6.20 percent rate for the Social Security benefits portion (the old age, survivors, and disability insurance fund) was automatically bumped up from $90,000 for 2005, to $94,200 for 2006.

The increase is based on changes in the Consumer Price Index, a government formula that measures inflation, from the third quarter of one year to the corresponding quarter of the next.

Withholding for Social Security during 2006 stops at $94,200. That translates into a top Social Security of $5,840.40.

But there is no cap on the amount of wages subject to the 1.45 percent rate for the Medicare fund (the federal hospital insurance program for the elderly).

Congress did away with the cap in 1993.

So employees who make more than $94,200 must continue to pay Medicare taxes on every dollar of their salaries, wages, bonuses, commissions, vacation pay, and the like, notes CCH, Inc., the Riverside, Ill., publisher of tax and other business information and software.

They forfeit $14.50 to Medicare taxes for each $1,000 of compensation ($1,000 multiplied by 1.45 percent).

Similarly, there is an automatic boost for self-employment taxes — Social Security taxes for the self-employed.

Self-employment taxes (line 58 of Form 1040 for 2005) are going to be higher for many individuals who operate their businesses or professions as sole proprietorships, in partnerships with others or as independent contractors.

Their self-employment tax rate remains 15.30 percent on net earnings (receipts minus expenses) twice that paid by typical employees, because they pay both the employer and employee halves.

But like FICA taxes, the self-employment tax consists of two components with different rates.

First, the rate is 12.40 percent for the Social Security benefits portion. The maximum amount of earnings subject to the 12.40 percent rate increases by $4,200, from $90,000 for 2005 to $94,200 for 2006.

Second, the rate is 2.90 percent for the Medicare fund, with no earnings ceiling.

For 2006, self-employment taxes for those with earnings above $94,200 increase by at least $520.80 (the excess of $94,200 over $90,000 multiplied by 12.40 percent).

Those who earn above $94,200 must continue to pay Medicare taxes on every dollar of their earnings.

They surrender $29 to Medicare taxes for each $1,000 of earnings ($1,000 multiplied by 2.90 percent).

The inevitable paperwork for the self-employment tax is done on Schedule SE, which accompanies Form 1040.

There is tax relief for employees who earn enough during 2006 for the maximum Social Security withholding, $5,840.40 (6.20 percent of $94,200), and who also have self-employment earnings.

They are relieved of self-employment tax liability for the 12.40 percent tax. Their liability is just for the 2.90 percent tax.

Moreover, individuals become liable for self-employment taxes only when their net earnings surpass $400.

But once above that modest amount, it makes no difference that they are not otherwise required to file 1040 forms or already receive Social Security benefits.

• Julian Block is a nationally recognized tax expert. Ask questions or send comments to [email protected]

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