FICA Taxes To Increase For High Earners In 2003

(RIVERWOODS, ILL., October 24, 2002) – Payroll taxes for some highly-paid wage earners just went up by $130.20 for 2003, according to CCH INCORPORATED (CCH), a leading provider of tax and payroll information and software. This is the result of a projected increase in the wage base on which Social Security taxes are due, from $84,900 in 2002 to $87,000 in 2003.

The tax increase will show up in the amount of FICA (Federal Insurance Contribution Act) tax deducted next year from the paychecks of those earning above the 2002 wage base. Although the tax rate for the Old Age, Survivors and Disability Insurance (OASDI) portion of FICA has held steady at 6.2 percent since 1990, the amount of wages subject to the tax can, and usually does, increase each year, based on a national wage index. The taxes paid by employees are matched by identical amounts paid by employers into the Social Security system.

The tax rate for the "Hospital Insurance," or Medicare, portion of FICA is 1.45 percent, and it applies to every dollar of earnings. This amount also is matched by employers.

"This means that high-earning, self-employed individuals may owe as much as $260.40 in additional self-employment tax in 2003," said Avram Sacks,Social Security analyst in CCH's Human Resources Group. "However, they can recoup some of this amount through a deduction on their federal income tax."

About 9.7 million workers will be affected by the higher wage base in 2003.

As painful as the additional withholding might be, it could have been worse if earlier estimates had held true.

The $87,000 wage base for 2003 is significantly lower than the estimate published in the 2002 Annual Report of the Board of Trustees of the Federal Old-Age, Survivors and Disability Insurance Trust Funds issued in March of this year. The 2003 wage base reflects national average wages for 2001, the variable upon which the 2003 wage base formula is based. The 2001 national average wage index of $32,921.92 is 2.38 percent higher than the 2000 national average wage index.

"This is much less than the 5.3 percent increase predicted in the most conservative scenario by the Social Security trustees in their March report," Sacks noted.

The lowered wage base will mean that Social Security will take in fewer revenues next year than expected, but it means that obligations to future retirees will be lower, as well.

"The wage base also is a benefits base," Sacks noted. "Only earnings up to the wage base are considered in calculating Social Security benefits. As a result, those who pay less now should receive less later. Some private pensions also use the amount of ‘covered compensation’ – that is, compensation up to the wage base – in calculating their benefits as well."

For 2003, there will be a $100 increase in the amount of wages a domestic worker can earn without being subject to FICA taxes. You can pay a domestic worker, such as a maid or nanny, up to $1,400 in 2003 without having to wrestle with federal withholding on wages.

CCH INCORPORATED, Riverwoods, Ill., is a leading provider of Social Security, tax, pension and benefits law information for attorneys, accountants and human resources professionals, including Payroll Management Guide, Pension Plan Guide, Employee Benefits Management, Social Security Reporter and Unemployment Insurance Reports. CCH also provides tax and business law information in print and electronic form for accounting, legal and health care professionals. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at cch.com and the CCH Human Resources site is hr.cch.com.

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