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Social Security benefits and wage base to increase in 2013

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The Social Security Administration (SSA) announced in a recent news release that monthly Social Security and Supplemental Security Income (SSI) benefits will increase by 1.7 percent in 2013. In addition, the 2013 inflation-adjusted wage base for determining the maximum amount of earnings subject to the Social Security (OASDI) tax will be $113,700, up from $110,100 in 2012.

The SSA estimates that as a result of the wage base increase approximately 10 million individuals, out of a total of 163 million workers who will pay Social Security taxes in 2013, will pay higher taxes. The increase in wage base and benefits is based on the increase in the cost-of-living (COLA) amounts calculated with reference to the Consumer Price Index (CPI-W) from the third quarter of 2011 through the third quarter of 2012.

The Employment Taxes: FICA, OASDI, and HI

The Federal Deposit Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed individuals. The Social Security (OASDI) portion remains 6.2 percent on earnings up to the applicable taxable maximum amount. (The Middle Class Tax Relief and Job Creation Act of 2012, which extended the reduced 4.2-percent employee-side OASDI rate through the end of 2012, expires at the end of December 2012, unless renewed by Congress.) The Medicare (HI) portion is 1.45 percent on all earnings. For self-employed workers the FICA tax is 15.3 percent (12.4 percent for OASDI and 2.9 percent for HI).

While the 2012 OASDI wage base rises from $110,100 in 2012 to $113,700 in 2013, the Medicare portion, unlike the Social Security (OASDI) portion, has no wage base limit.

Monthly Social Security benefits

Monthly Social Security benefits will increase by 1.7 percent in 2013. Supplemental Security Income (SSI) benefits will also increase 1.7 percent in 2013. The 1.7-percent cost-of-living adjustment (COLA) will be reflected in Social Security benefits starting January 2013 and SSI benefits beginning December 31, 2012. The 1.7-percent increase is lower than the 3.6-percent increase that occurred in January 2012, owing to low levels of inflation over the past year.

Nanny Tax

The Domestic Employees coverage threshold (more commonly known as the “Nanny Tax”) is also determined in accordance with any increase to COLA. Domestic employees can include child care workers, housecleaners, etc., as long as they work in the taxpayer’s residence and are paid and controlled directly by the taxpayer. Because inflation was low this year, the domestic employees coverage threshold remains $1,800 for 2013, the same as it was in 2012.

Any amount paid by an employer to any employee for domestic services under $1,800 is not subject to FICA taxes. Once the $1,800 Nanny Tax threshold is met, the total amount—and not just the excess—is subject to employment tax.