The planned increase in the social security wage base is important for small business to be aware of.
Recently, the Social Security Administration announced that the maximum earnings subject to Social Security tax will increase from $137,700 in 2020 to $142,800 in 2021.
For 2021, the FICA tax rate for employers and employees is 7.65% (6.2% for Social Security and 1.45% for Medicare).
For 2021, the Social Security tax rate is 6.2% each for the employer and employee (12.4% total) on the first $142,800 of employee wages. For Medicare, the tax rate is 1.45% each for the employee and employer (2.9% total). Vecause Medicare doesn’t have a base wage tax, all covered wages are subject to Medicare withholding.
In addition to the Medicare tax of 1.45%, employers must withhold an additional 0.9% Medicare tax from wages paid employees in excess of $200,000 annually.
Employees with multiple jobs
If you have employees who also have a second job, these employees might request that you stop withholding Social Security Taxes once they reach the wage base amount. Although, you generally can’t stop the withholding, the employees are eligible for a credit on their returns for the excess withheld.
Employees working past retirement age
Employers who are older than 65 (or 67, depending on birth year) may have to deal with the retirement earnings test. This applies to employees who continue to work while collecting Social Security benefits. For these individuals, $1 in benefits will be withheld for every $2 in earnings above $18,960 in 2021 (up from $18,240 in 2020).
For employees collecting benefits who reach normal retirement age in 2021, withholding is $1 in benefits for every $3 in earnings above $46,920 (up from $48,600 in 2020), until the individual reaches normal retirement age. After that, there’s no limit.
Reach out with questions about how this applies to you or your employees. We can help you maintain compliance and deal with the details of payroll taxes.
Please reach out to your trusted Smolin professional with any questions or concerns.