Social Security wage base

People who make more than $106,800 this year will not have to pay Social Security tax on earnings above that amount. 2011 is the third year this wage base has been pegged at $106,800.

The base has risen quite a bit over the years. In the year 2000, it was $76,200. From 1937 to 1950 it was $3,000.

From 1937 to 1949, the Social Security withholding rate on wages was 1%. When Medicare started in 1966, the withholding rate was 0.35%.

The base in 2012 is expected to be $110,100. (This is not official yet.) It is estimated to be $113,100 in 2013, $117,600 in 2014 and $122,700 in 2015.

The tax rate for Social Security withholding from pay checks has been 6.2% since 1990. For 2011 however, it has been lowered to 4.2%. It goes back to 6.2% in 2012.

The Medicare tax of 1.45% has no limit. If you make $1,000,000 this year, 1.45% of it will go to Medicare. That's $14,500. The Social Security tax, since it stops for wages above $106,800, will never go above $4,485.60 (4.2% of 106,800) for anyone in 2011.

And by the way, one of the provisions of the Health Care law that passed last year is that Medicare tax will be charged not only on earned income but also on investment income. However, that is not in effect for 2011.

For every employee who has Social Security and Medicare taxes withheld from his or her pay, the employer must also pay into those funds. For every year but 2011, the employer's share was equal to the employee's share. This year, though the Social Security rate for employees was reduced to 4.2%, the employer's rate remains 6.2%.

The total payroll tax "burden" (as it is called) for these two taxes, in 2010 was:
Employee's Social Security withholding 6.20%
Employer's Social Security share 6.20%
Employee's Medicare withholding 1.45%
Employer's Medicare share 1.45%
Total 15.30%

In 2011 the total is 13.3%, because of the 2% reduction in employee withholding. In 2012 it will return to 15.3%.

Self-employed people must pay the entire amount themselves: 13.3% of earnings this year, and 15.3% every other year. This can be a brutal blow to a self-employed person at tax time.