In conjunction with its announcement regarding an increase in monthly Social Security benefit checks, the Social Security Administration announced an increase in the maximum amount of earnings subject to Social Security and self-employment taxes. The wage base for Social Security taxes will rise to $94,200 for 2006, up from $90,000 in 2005.
So if you're one of the 10 million or so folks who earn more than $94,200, you will be paying $260.40 more FICA in 2006. There is no ceiling on the amount of earnings subject to the separate Medicare tax. In other words, Medicare taxes are like the Energizer bunny, they keep on going and going and going...
The combined rates for social security and Medicare taxes remain the same in 2006 as in 2005: 7.65 percent for employees and 15.30 percent for self-employed individuals. The Social Security portion is 6.20 percent on wages up to the maximum taxable cap ($94,200 for 2006), which will require both employer and employee to pay a maximum Social Security tax of $5,840.40 each. The Medicare portion is still 1.45 percent each, again--with no wage cap.
For example, let's say Tom Smith earns $120,000 in both 2006 and 2005. Both Tom and his employer must pay $260.40 more Social Security tax in 2006 than in 2005 (6.2 percent of the $4,200 difference between the maximums for 2006 and 2005). This is the case despite the fact that Tom's income is the same for both years.
In addition, Tom will have to pay 1.45 percent Medicare tax on his full earnings of $120,000 for 2006, just as he did for 2005--$1,740 each year. His combined Social Security and Medicare taxes will amount to $7,580.40 for 2006. Tom's employer will have to match the same amount in tax-deductible payroll taxes.