The Social Security Administration recently announced an increase of 4.6% in the maximum social security taxes you can pay for 2008, with the maximum social security wage base increasing to $102,000 in 2008 from $97,500 in 2007.
Each year, the government bumps up the maximum social security taxes that a person can pay. For 2008, the maximum wage base jumps to $102,000, an increase of $4,500 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
People who are self-employed are subject to social security and Medicare taxes as well. Known as the self-employment tax, anyone with more than $400 of net self-employment income will need to complete and attach a Schedule SE to their income tax return to calculate this tax.
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 for each of these taxes. Remember, employers are required to match the social security and Medicare taxes withheld from their employees’ 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.
If You Work For More Than One Employer and Earn More Than $97,500
For 2007, employers will withhold social security taxes from the first $97,500 earned by each of their employees. Anyone who works for more than one employer and earns more than $97,500 in social security wages will have excess social security taxes withheld, and will be able to claim a credit for these excess taxes on their 1040 as additional federal income taxes paid in.
