Payroll Taxes Costs Jet Higher

Social Security taxes have been and remain a scandalous burden if you make money by the sweat of your brow. First, the basic rules: Social Security taxes are imposed not only on employees and employers, but on self-employed individuals as well.

Social Security taxes have been and remain a scandalous burden if you make money by the sweat of your brow.

First, the basic rules: Social Security taxes are imposed not only on employees and employers, but on self-employed individuals as well. The FICA rate on employers is 7.65 percent; the same rate applies to employees; and the self-employment rate is 15.3 percent.

The total 7.65 percent for FICA taxes has two components: 6.2 percent is Social Security tax and 1.45 percent is the Medicare hospital insurance tax (MHIT). The equivalent figures for self-employment tax (total of 15.3 percent) are 12.4 percent for Social Security and 2.9 percent for MHIT.

The Social Security tax is collected based on salary or self-employment income (a \$68,400 ceiling for 1998). The ceiling is adjusted annually for inflation. There is no ceiling on the MHIT.

Now let's crunch the numbers for 1999, using the higher Social Security tax ceiling of \$72,600, and determine the cost to the employer for an employee (call her Kay) earning \$100,000.

• \$72,600 × 6.2% = \$4,501.20
• \$100,000 × 1.45% =
• 1,450.00
• \$5,951.20

And don't forget, Kay gets hit for the same amount. Let's see, that's \$5,951.20 each for the employer and Kay, or a total of \$11,902.40 for both. Outrageous! And remember, the HMIT (I call it the "maximum hit") of 2.9 percent (1.45 percent times 2) never stops.

Are you self-employed? The results are a total tax disaster. Why? You, and you alone, must pay the entire tax. For example, the tax for self-employed business owner (not incorporated) earning \$100,000 is the same as for Kay and her employer combined: a thief-in-the-night amount of \$11,902.40. There is one ray of sunshine in all this. You can deduct one-half of the Self Employment tax. Refer to Section 164(f) of the Internal Revenue Code.