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Income Prone to Payroll Tax Increases

HRPS recently shared that high-earning employees will find more of their salary subject to Social Security payroll taxes starting on Jan. 1, 2015.

Based on the increase in average wages, the maximum amount of earnings subject to the Social Security tax (the “taxable maximum”) will increase to $118,500 from $117,000 for 2015, the Social Security Administration (SSA) announced on Oct. 22. Of the estimated 168 million workers who will pay Social Security taxes in 2015, about 10 million will pay higher taxes because of the increase in the taxable maximum, the SSA said.

Social Security and Medicare payroll withholding are collected together as the Federal Insurance Contributions Act (FICA) tax.

By Jan. 1, U.S. employers should:

Adjust their payroll systems to account for the higher taxable maximum under the Social Security portion of FICA.

Notify affected employees that more of their paychecks will be subject to FICA.

Withholding Rates Unchanged

For 2015:

The portion of the Social Security FICA tax that employees pay remains unchanged at the 6.2 percent withholding rate up to the taxable maximum.

Correspondingly, the portion of the tax that employers cover also remains at 6.2 percent of employee wages up to the taxable maximum.

This amounts to a total Social Security FICA tax of 12.4 percent, paid on income up to $118,500.

Self-employed individuals are responsible for paying the entire 12.4 percent.

With the higher income ceiling, the maximum yearly Society Security tax withholding amount in 2015 rises to $7,347 (6.2 percent withholding on earnings up to $118,500), up from $7,254 (6.2 percent withholding on earnings up to $117,000).

A Social Security fact sheet shows additional adjustments for 2015.

Medicare’s Bite

For most Americans, the Medicare portion of the FICA tax remains at 2.9 percent, of which half (1.45 percent) is paid by employees and half by employers.

Unlike Social Security, there is no limit on the amount of earnings (which includes salary and bonus income) subject to the Medicare portion of the tax. This results, for most American wage earners, in a total FICA tax of 15.3 percent (Social Security plus Medicare), half of which is paid by employees and half by employers.

Again, self-employed individuals are responsible for the entire FICA tax rate of 15.3 percent (12.4 percent Social Security plus 2.9 percent Medicare).

Additional Medicare Tax

For high earners, Medicare takes a somewhat larger bite under a provision of the Affordable Care Act that makes the employee-paid portion of the Medicare FICA tax subject to a 0.9 percent Additional Medicare Tax on amounts over the statutory threshold. The Additional Medicare Tax should not be confused with the Alternative Minimum Tax on high incomes, which does not involve mandatory payroll withholding.

The threshold annual compensation amounts that trigger the Additional Medicare Tax are:

$250,000 for married taxpayers who file jointly.

$125,000 for married taxpayers who file separately.

$200,000 for single and all other taxpayers.

Additional Medicare Tax withholding applies only to compensation paid to an employee that is in excess of these thresholds in a calendar year. These thresholds are not inflation-adjusted, and thus they apply to more employees each year.

The Additional Medicare Tax raises the wage earner’s portion on compensation above the threshold amounts to 2.35 percent; the employer-paid portion of the Medicare tax on these amounts remains at 1.45 percent.

The IRS has posted responses to frequently asked questions regarding the Additional Medicare Tax.

Net Investment Income Tax

Although it is not a payroll tax, HR professionals also should be aware of the net investment income tax (NIIT) that high earners must pay when they file their income tax returns. This tax consists of a 3.8 percent surtax on investment income, including capital gains, to be paid by those with modified adjusted gross income above $200,000 (single filers) or $250,000 (joint filers).

Individuals that expect to be subject to the tax should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties.

Higher Social Security Payments

While the tax bite on employees will be rising, retirees and others who rely on Social Security and Supplemental Security Income (SSI) benefits—nearly 64 million Americans—will see their payments increase by 1.7 percent in 2015 due to the annual cost of living adjustment (COLA), slightly more than the 1.5 percent COLA that took effect in 2014. The Social Security Act governs how the COLA is calculated.

FUTA Credit Reduction States

While the standard Federal Unemployment Tax Act (FUTA) rate is 6 percent on the first $7,000 of covered wages, employers generally receive a FUTA credit reduction of 5.4 percent for state unemployment insurance (UI) taxes they pay, reducing the FUTA rate for most employers to 0.6 percent of wages paid up to a limit of $7,000 per worker, or $42 per employee per year. However, states that have outstanding federal UI loan balances are subject to reduced tax credits, resulting in higher FUTA taxes for employers in those states.

The Department of Labor announced that employers will be subject to an increased FUTA tax rate in January 2015 based on FUTA taxable wages paid during 2014 in these affected states: California, Connecticut, Indiana, Kentucky, New York, North Carolina, Ohio and the Virgin Islands.

The FUTA tax liability for 2014 is not due or reportable until Jan. 31, 2015, the filing date for the 2014 Form 940.

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