Nanny tax threshold remains at $1,800 for 2013 and Social Security wage base increases to $113,700 for 2013

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November 27, 2012

Nanny tax threshold remains at $1,800: On its website, the Social Security Administration has announced that for 2013, cash remuneration paid by an employer for domestic service in the employer’s private home isn’t FICA wages if the amount paid during the year is less than $1,800 (same as for 2012). The dollar threshold applies separately to each domestic employee.

Social Security wage base increases to $113,700 for 2013:  The Social Security Administration has also announced in Social Security News Release 10/16/2012, that the wage base for computing the Social Security tax (OASDI) in 2013 increases to $113,700 from $110,100, which was the wage base for 2012. The $3,600 increase, which is about 3.27%, is due to an increase in average total wages.

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurancce (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

For 2013, the FICA tax rate for employers is 7.65% each—”6.2% for OASDI and 1.45% for HI. For 2013, an employee pays:

  1. 6.2% Social Security tax on the first $113,700 of wages (maximum tax is $7,049.40 [6.20% of $113,700]), plus
  2. 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
  3. 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return). (Code Sec. 3101(b)(2))

For 2012, the OASDI rate for employees is 4.2%; the OASDI rate for employers is 6.2% and the HI rate for both employers and employees is 1.45%.

For 2013, the self-employment tax imposed on self-employed people is:

  • 12.4% OASDI on the first $113,700 of self-employment income, for a maximum tax of $14,098.80 (12.40% of $113,700); plus
  • 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return), (Code Sec. 1401(a), Code Sec. 1401(b)), plus
  • 3.8% (2.90% regular Medicare tax + 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return). (Code Sec. 1401(b)(2))

For 2012, the self-employment tax rate is 13.3%: 10.4% for OASDI, reflecting the two percentage point drop in the OASDI rate for employees, plus 2.9% for HI.

While many tax issues remain in dispute between the political parties, there seems to be a consensus that the two percentage point drop in the OASDI rate for employees and the equivalent reduction for self-employed persons will not be continued for 2013.

There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.

Example: On a salary of $113,700 (or more), an employee and his employer each will pay $7,049.40 in Social Security tax in 2013. For 2012, an employer pays $6,826.20 on a salary of $110,100 (or more) but an employee pays only $4,624.20.

Thus, a self-employed person with at least $113,700 in net self-employment earnings will pay $14,098.80 for the Social Security part of the self-employment tax in 2013. For 2012, a self-employed person with at least $110,100 of net self-employment earnings pays only $11,450.40 for the Social Security part of the self-employment tax.  Self-employed workers deduct half of their self-employment tax above-the-line in arriving at adjusted gross income.

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