Tax Tip Tuesday: 2016 Social Security Wage Base

October 20, 2015

 

Today we will discuss the Social Security wage base for 2016.


The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2016 will remain at $118,500, unchanged from 2015.


The Social Security Act provides for an automatic increase in Social Security and Supplemental Security Income (SSI) benefits if there is an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). As determined by the Bureau of Labor Statistics, there is no increase in the CPI-W, so there is no cost of living adjustment (COLA) in 2016. Since there is no COLA, the statute prohibits a change in the maximum amount of earnings subject to the Social Security tax.


The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI is commonly known as the Social Security tax), and the other for Hospital Insurance (HI is commonly known as the Medicare tax).


For 2016, the FICA tax rate for employers is 7.65% each—6.2% for OASDI and 1.45% for HI.


For 2016, an employee pays all of the following:

  • 6.2% Social Security tax on the first $118,500 of wages (maximum tax is $7,347.00 (6.2% of $118,500)).

  • 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

  • 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

 

For 2016, the self-employment tax imposed on self-employed people is:

  • 12.4% OASDI on the first $118,500 of self-employment income, for a maximum tax of $14,694.00 (12.40% of $118,500).

  • Plus 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return).

  • Plus 3.8% (2.90% regular Medicare tax + 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).

 

There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.

 

Disclaimer: The items included in the Tax Tip Tuesday Video Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein

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