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.

More on 1099s

Congress is considering repealing the new requirement that 1099s be filed on payments to corporations. They may also repeal the requirement that landlords file 1099s on all their payments for services (as discussed in an earlier post).

Even More 1099's

In 2012, additional 1099 reporting requirements are due to take effect, unless Congress repeals them. They would require that anyone with any business income issue 1099s to any vendor to whom they paid at least $600. Payments for both goods and services would require 1099s. (Under current law, payments for goods are not covered, and the focus is on payments to unincorporated individuals.)

Congress and the President have talked about repealing this new requirement, because nobody likes it. However, because it is projected to generate over $200 billion in tax revenues over the next 10 years, they have to figure out how to plug that budget gap if they repeal it. There is a lot of momentum on the side of repealing it, but it may not be easy.

Unreported gifts

Many people transfer real estate titles to heirs or other family members without filing a gift tax return. The IRS has never checked on this to any great extent, but it is starting to do so now. If the transfer was done for anything less than fair market value, it could trigger the need for a gift tax return. Most people would not owe any actual gift tax, because their gifts are under the tax threshold. However, the law says a gift tax return must be filed. A gift tax return is supposed to be filed if you give any one person more than $13,000 during a calendar year. (The filing threshold was $10,000 several years ago; it has been gradually raised over the past few years to the present threshold of $13,000.)

Obamacare legal setback

A Federal district court judge in Florida ruled that the healthcare reform law is unconstitutional. The Supreme Court will get the final word--in a year or two.

filing delay date

The IRS has specified February 14, 2011, as the date on which it will begin accepting returns with certain characteristics. The most popular of these characteristics is itemized deductions. Most returns without itemized deductions are already being accepted.

Landlords must issue 1099s

Beginning in 2011, landlords must issue 1099s if they pay someone (e.g., a self-employed carpenter or plumber) $600 or more during the year. Previously, landlords were not covered by the 1099 laws.

Some landlords will be exempt if their rental income is very small. The IRS will let us know at a later date (hopefully sometime this year) how much rental income will trigger the 1099 requirement.