Get ready for higher Social Security taxes!
They will go up by 2%, from 4.5% this year to 6.2% next year. But that’s only for people who work for an employer. For self-employed Americans, the bite will be double.
As explained by Bill Bischoff of SmartMoney.com, May 27, 2011:
For 2011, the Social Security tax hit is less because of a one-year 2% point reduction in the Social Security tax withholding rate on wages — from the normal 6.2% to 4.2% (your employer’s 6.2% rate is unchanged). For 2012 and beyond, however, Social Security tax withholding on your wages will jump back to the standard 6.2% rate.
If you’re an employee, your wages are hit with the 12.4% Social Security tax up to the annual wage ceiling. Half the Social Security tax bill is withheld from your paychecks. The other half is paid by your employer. That arrangement is very deceptive because unless you closely examine your pay stubs, you may be blissfully unaware of how much the Social Security tax actually costs because your employer isn’t really paying your Social Security tax. Your employer’s “share” of your Social Security tax is actually part of your entire pay-and-benefits salary package.
For both 2010 and 2011, the Social Security tax self-employment income ceiling is $106,800 (same as the wage ceiling for employees). So if your 2010 self-employment income was $106,800 or more, you paid the Social Security tax maximum of $13,243 last year (12.4% x $106,800 = $13,243).
In 2011, the hit will be less thanks to a one-year 2 percentage-point reduction in the Social Security tax rate on self-employment income — from the normal 12.4% to 10.4%. For 2012 and beyond, however, the Social Security tax on self-employment income is scheduled to return to the standard 12.4% rate.
The SmartMoney.com article’s writer, Bischoff, estimates that in the course of his 35-year working life, he has paid $219,000 in Social Security tax and his employers paid another $41,000. That amounts to $260,000 in total.
Bischoff writes: “if I could get the $260,000 back, stop paying the tax, and forego receiving any benefits, I would do it in a heartbeat. In fact, if I could just stop paying the tax in exchange for walking away from any future benefits, I would do that too. Why? Because I have big doubts I will actually receive the promised level of benefits when the time comes…the system is now projected to run out of money in 2036 unless taxes are raised or benefits are cut.”
I have bad news for Bischoff:
The Social Security system is already broke.
In January this year, the Congressional Budget Office issued a little-noticed report that Social Security will effectively run a $45-billion deficit in 2011 and continue to run deficits totaling $547 billion over the coming decade. See my post on the report HERE.