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Andrew
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Each year, the government bumps up the maximum social security taxes that you can pay. For 2008, the maximum wage base jumps to $102,000, an increase of $4,500, or 4.6%, over the 2007 max of $97,500. 

The Social Security Administration predicts that 12 million individuals will end up paying higher taxes due to this increase, out of the estimated 164 million workers who will pay social security taxes next year.

At a rate of 6.2%, the maximum social security taxes that your employer will withhold from your salary increases by $279, from $6,045 in 2007 to $6,324 in 2008.  In addition, your employer also withholds Medicare taxes from your pay at a rate of 1.45%. There is no limit on your wages subject to this tax.

Calculating the Self-employment Tax:

If you're self-employed and earn more than $400 in net profit from your business, you're subject to social security and Medicare taxes as well. Known as the "self-employment tax", you'll need to complete a Schedule SE to calculate this tax, and then report the amount due on page 2 of your Form 1040.

The self-employment tax is based on a social security tax rate of 12.4% and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee's portion and the employer's portion of both taxes.  Remember, when you work as an employee, your employer matches the social security and Medicare taxes withheld from your pay.

Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes.  If you earn income as an employee and as an independent contractor, and your combined income exceeds $97,500 in 2007, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and you'll end up overpaying your self-employment taxes.

Do You Work For More Than One Employer in 2007 and Earn More Than $97,500?

For 2007, each of your employers withholds social security taxes from the first $97,500 that you earn from them.  If you work for more than one employer and your total salary from all sources exceeds that threshold, you'll have excess social security taxes withheld. Make sure to claim a credit for these excess taxes on your 1040 as additional federal taxes paid in.

For Example:

Let's say you work for two employers and earn $75,000 from each employer. Employer #1 withholds $4,650 in social security taxes ($75,000 * 6.2%). Employer #2 also withholds $4,650 in social security taxes - for a total of $9,300 in social security taxes withheld during the year. Since the maximum social security taxes that you should pay through payroll withholdings for 2007 is limited to $6,045, the excess of $3,255 counts as additional federal income taxes paid in by you.

A) Social security taxes withheld by Employer #1

$4,650.00

B) Social security taxes withheld by Employer #2

$4,650.00

C) Total social security taxes withheld during the year (A+B)

$9,300.00

D) Social security max for 2007

$6,045.00

E) Excess social security taxes withheld (C-D)

$3,255.00

http://www.ssa.gov

A great place to find out more about your social security taxes and projected benefits is at the Social Security Administration's website located at http://www.ssa.gov. 

FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:

 

2008 wage base max: $102,000
2007 wage base max: $97,500
2006 wage base max: $94,200
2005 wage base max: $90,000
2004 wage base max: $87,900
2003 wage base max: $87,000
2002 wage base max: $84,900
2001 wage base max: $80,400
2000 wage base max: $76,200
1999 wage base max: $72,600
1998 wage base max: $68,400
1997 wage base max: $65,400
1996 wage base max: $62,700
1995 wage base max: $61,200
1994 wage base max: $60,600

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