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41-660: Each calendar year, the wages of each covered worker up to the Social Security Wage Base (SSWB) are recorded along with the calendar by the Social Security Administration . If a worker has 35 or fewer years of earnings, then the Average Indexed Monthly Earnings is the numerical average of those 35 years of covered wages; with zeros used to calculate the average for the number of years less than 35. However, because of wage inflation

82-574: A one-year reduction in the FICA payroll tax , as part of a compromise agreement between Obama and Congressional Republicans. The overall monetary impact of the measure has been placed at $ 858 billion. The law was also known, during its earlier formulation in the House of Representatives, as the Middle Class Tax Relief Act of 2010 . The package has been referred to as the "Obama-GOP tax deal" as well as

123-437: A spike, when in fact it is a return to the levels imposed in the years 1990 through 2010. Note that although self-employed individuals pay 12.4%, this is mitigated two ways. First, half of the amount of the tax is reduced from salary before figuring the tax (you don't pay Social Security tax on the tax your employer pays for you.) Second, the "employer" half is an adjustment to income on the front page of Form 1040. As part of

164-626: A worker's Social Security benefit . In 2020, the Social Security Wage Base was $ 137,700 and in 2021 was $ 142,800; the Social Security tax rate was 6.20% paid by the employee and 6.20% paid by the employer. A person with $ 10,000 of gross income had $ 620.00 withheld as Social Security tax from his check and the employer sent an additional $ 620.00. A person with $ 130,000 of gross income in 2017 incurred Social Security tax of $ 7,886.40 (resulting in an effective rate of approximately 6.07% –

205-477: Is identical to the SSWB the contributions may be double above the base not to exceed 5.7% for excess plans. For offset plans the defined-contribution plan may base contributions on total base salary and then reduce or "offset" the contribution rate for salary below the integration base. If the integration base for such offset plans is identical to the SSWB, then the reduction could be up to 5.7%. For defined benefit plans

246-409: Is reduced to $ 4,485.60, but the maximum employer share remains at $ 6,621.60. The maximum employee share in 2012 is reduced to $ 4,624.20, but the maximum employer share remains at $ 6,826.20. Effectively, this was a 4.2% rate charged to the employee, and 6.2% rate to the employer. This resulted in an approximately 40/60 split but reduced the total contribution. See here for a complete historical list of

287-567: Is reflected in the above table, showing the reduction from $ 6,621.60 to $ 4,485.60. Because taxes and benefits are based only on earnings up to the SSWB, pension plans can base contributions and or benefits in greater degree on earnings above the SSWB (excess plans) or reduce benefits or contributions below the SSWB (offset plans). The pension compensation nondiscrimination laws (Internal Revenue Code Section 401(a)(4)) require that qualified pension plans not discriminate in benefits, rights and features in favor of highly compensated employees (in 2007,

328-682: Is the ratio of the Wage Index two years before the current year to the Wage Index during the earnings year. The following table shows the Wage Index in effect during each year. The following steps should be taken to determine the Average Indexed Monthly Earnings: Social Security Wage Base For the Old Age, Survivors and Disability Insurance (OASDI) tax or Social Security tax in the United States,

369-580: The 2010 Tax Relief Act , was passed by the United States Congress on December 16, 2010, and signed into law by President Barack Obama on December 17, 2010. The Act centers on a temporary, two-year reprieve from the sunset provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), together known as

410-588: The Social Security Wage Base ( SSWB ) is the maximum earned gross income or upper threshold on which a wage earner's Social Security tax may be imposed. The Social Security tax is one component of the Federal Insurance Contributions Act tax (FICA) and Self-employment tax , the other component being the Medicare tax. It is also the maximum amount of covered wages that are taken into account when average earnings are calculated in order to determine

451-462: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted on December 17, 2010, the employee Social Security tax rate is reduced from 6.2% to 4.2% for wages paid during the year 2011 and 2012. The employer Social Security tax rate and the Social Security Wage Base were not directly impacted by this act, though they did change; only the employee's tax rate changes. This

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492-536: The " Bush tax cuts ." Income taxes would have returned to Clinton administration -era rates in 2011 had Congress not passed this law. The Act also extends some provisions from the American Recovery and Reinvestment Act of 2009 (ARRA or 'the Stimulus'). The act also includes several other tax- and economy-related measures intended to have a new stimulatory effect, mostly notably an extension of unemployment benefits and

533-450: The " Slurpee Summit " of November 30, 2010, President Obama appointed Treasury Secretary Tim Geithner and Office of Management and Budget chief Jack Lew to help Republicans and Democrats hammer out an agreement on extending the Bush tax cuts. President Obama wanted to extend the tax cuts for taxpayers making less than $ 250,000 a year. Congressional Republicans agreed but also wanted to extend

574-468: The "Obama tax cuts". Key aspects of the law include: The years leading up to 2010 were filled with speculation and political debate about whether the Bush tax cuts should be extended, and if so, how. Rolling back the cuts for the wealthiest taxpayers had been one of the core promises of Obama's 2008 presidential campaign . The issue came to a head during the lame duck session of the 111th Congress . At

615-415: The $ 70,000 employee’s salary, or $ 4,340, for a grand total of $ 8,680 -- which exceeds the cap of $ 7,886.40 by $ 739.60. The over-payment would be entered on the applicable line of Form 1040 and, assuming the employee did not owe any other Federal taxes, would be refunded to the employee. The employers who each paid $ 4,340 will not get a refund, since they are not aware that the employee overpaid in aggregate for

656-422: The 1994 Republican Revolution . The White House denied any such thing was happening. Administration officials such as Vice President Joe Biden worked to convince the wary Democratic members of Congress to accept the plan, notwithstanding a continuation of lower rates for the highest-income taxpayers. On December 10, Democratic-caucusing independent Senator Bernie Sanders made a filibuster-like stand against

697-416: The 2013 guidance from SSA indicates the full rate OASDI is 12.4% for 2013. See footnote a. at 2013 SSA.gov link . Returning to the traditional 6.2% OASDI employee share for 2013 effectively reduces take home pay by 2% and increases the maximum OASDI contribution by the same amount, returning it to traditional levels. The dip in the maximum OASDI contributions for 2011 and 2012 causes the 2013 rate to appear as

738-459: The 60 needed for cloture . On December 6, 2010, President Obama announced that a compromise tax package proposal had been reached with the Republican congressional leadership. This centered around a temporary, two-year extension of the Bush tax cuts and included additional provisions designed to promote economic growth. This proposal was identical to what became law. In announcing the agreement,

779-481: The Average Indexed Monthly Earnings will only take the average of the 35 highest years of indexed covered wages. This figure is then divided by 12 to get a monthly rate (thus the self-describing name "Average Indexed Monthly Earnings"). Earnings in all years prior to two years before the current year are indexed for inflation . This is done by multiplying the amount credited to the Social Security earnings record in any given year by an indexing factor. The indexing factor

820-474: The Bush tax cuts for "middle incomes", meaning those earning under $ 250,000 for joint filers (and for singles, those earning under $ 200,000). It would restore the previous, higher rates for those "high income" people above that mark. A second proposal raised the dividing line to $ 1 million. Both proposals were able to pass in the House, but on December 4, 2010, both fell short in the Senate, getting only 53 votes and not

861-470: The House passed it 277–148, with it getting only a modest majority among Democrats and a large majority among Republicans (of the 148 votes against the bill in the House, 112 were cast by Democrats and only 36 by Republicans). Before that, an amendment put forward by Democratic Representative Earl Pomeroy and the progressives among the Democratic caucus to raise the estate tax – the ultimate sticking point of

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902-452: The Social Security Wage Base. (**) Since 1990, the employer & employee share has usually been 6.2% each for a 50/50 split of the 12.4% combined total. The changes shown below applied In 2011 and 2012 when the rates were temporarily lowered to 4.2% for the employee (but remained at 6.2% for the employer). In 2013, the employee rate returns to 6.2% for a 50/50 split with the employer and a higher Maximum Contribution. For self-employed people,

943-462: The age 62 calculation done in 2006 must be based on the most recent data which is the 2004 national average wage. By law, all covered workers who attain age 62 in 2006 must be treated the same with respect to wage indexation so the 2004 figure for national average wage must be used for the entire 2006 year. Thus the age 61 and age 62 wages will get a bonus because they will not be indexed downward. For workers with more than 35 years of covered wages,

984-469: The cap, because each employer may not know how much the employee has already paid in Social Security tax in other jobs. The Social Security tax coverage will be calculated on their personal return, and any excess is applied towards their Federal taxes. For example, in 2017 an employee works two jobs (either concurrently or consecutively) paying $ 70,000 each. Since each employer calculates the social security taxes independently, each employer will withhold 6.2% of

1025-598: The change quickly, smaller companies that do their own payrolls could take longer. It was possible that employees would have to wait for up to three paychecks to see the reduction take place. The IRS had to reprogram its processing systems for some of the provisions in the law, and said that those who file their tax returns early would need to wait until at least the middle of February if they itemize deductions or take certain other deductions. Any refunds coming to taxpayers would be similarly delayed. Vendors of tax preparation software also had to modify their applications and get

1066-407: The compromise tax proposal, speaking for over eight hours and mocking the need for the wealthy to own multiple homes. Overall, the compromise proved widely popular in public opinion polls, with two-thirds support or more among self-described liberals, moderates, and conservatives, and it allowed Obama to portray himself as a consensus-builder not beholden to the liberal wing of his party. The bill

1107-553: The deal for them and the cause of a minor revolt among those against it – had failed on a 194–233 vote. The Washington Post called the approved deal "the most significant tax bill in nearly a decade". Obama signed the bill into law on December 17, 2010. Much of the Democratic Congressional leadership was absent from the signing ceremony, indicating their ongoing unhappiness with the law. Washington Post writer Dan Balz asserted that Obama's ability to win passage for

1148-432: The federal government indexes wages so that $ 35,648.55 earned in year 2004 is exactly the same as $ 23,753.53 earned in 1994. Those two figures came from the yearly list of National Average Wage indexing series. This series gross up earlier years wages so that all years earnings up to age 60 are put on equal footing. Because it takes more than one year to fully collect such data, and because some people have January birthdays,

1189-535: The idea for increasing the national deficit. Some Democrats were also wary of the notion, either because they thought the return to the normal rate one year hence would be characterized as a politically unpalatable "tax hike", or because they feared that reductions in the payroll tax would undermine the basic model that Social Security was based on. On December 15, the Senate passed the compromise package with an 81–19 vote, with large majorities of both Democrats and Republicans supporting it. Near midnight of December 16,

1230-707: The integration base is a career average of the SSWB for each year of the worker's career, which in pension law is called "covered compensation" base. Under pension law, the SSWB may not be projected to increase in the future so a new hire's covered compensation base would contain all future years at the current year's SSWB. Excess and offset plans also exist for defined-benefit plans. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ( Pub. L.   111–312 (text) (PDF) , H.R. 4853 , 124  Stat.   3296 , enacted December 17, 2010 ), also known as

1271-621: The law indicated a "resilience of the occupant of the Oval Office" and a possible course he would take during the next Congress. Final Senate vote: Final House vote: The passage of the law so close to the new year caused a scramble for many parties involved. Employers had to modify payroll systems to the new lower deduction for the FICA payroll tax. The Internal Revenue Service (IRS) allowed employers until January 31, 2011, to do so. While companies that specialize in payroll processing could adapt to

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1312-557: The national deficit . The cut of the FICA payroll tax in the agreement was for one year only at a two percent reduction. This tax holiday was intended as an economic stimulus by Obama and the Democrats, with the value of boosting the disposable income of American families. It would not worsen the Social Security program's financial strength , as the shortfall would be made up from general revenues. Some Republicans thus criticized

1353-482: The president said, "I'm not willing to let working families across this country become collateral damage for political warfare here in Washington. And I'm not willing to let our economy slip backwards just as we're pulling ourselves out of this devastating recession. ... So, sympathetic as I am to those who prefer a fight over compromise, as much as the political wisdom may dictate fighting over solving problems, it would be

1394-429: The rate was lower because the income was more than the 2017 "wage base", see below), with $ 7,886.40 paid by the employer. A person who earned a million dollars in wages paid the same $ 7,886.40 in Social Security tax (resulting in an effective rate of approximately 0.79%), with equivalent employer matching. In the cases of the $ 130k and $ 1m earners, each paid the same amount into the social security system, and both will take

1435-448: The same out of the social security system. The Congressional Budget Office considers the employer share of taxes to be passed on to employees in the form of lower wages than would otherwise be paid, and counts them as part of the employees’ tax burden. Self-employed individuals pay the entire amount of applicable tax. When an employee works for several different companies during a tax year, their Social Security deductions could exceed

1476-400: The situation, but also lashed out at liberal Democratic opponents of the deal as "sanctimonious" purists and compared it to their unhappiness over the lack of a public option in the health care reform legislation the previous year . His stance led to immediate speculation among pundits that he was engaging in political triangulation , akin to what President Bill Clinton had done following

1517-409: The tax cuts for those making over that amount. Indeed, all 42 Republican senators joined in saying that, until the tax dispute was resolved, they would filibuster to prevent consideration of any other legislation, except for bills to fund the U.S. government. The Middle Class Tax Relief Act of 2010 originated in the Democratic caucus within the House in early December 2010, and proposed to extend

1558-412: The threshold is $ 100K of 2006 gross pay including bonuses and overtime). Because Social Security provides a progressive benefit formula and stops taxation at the SSWB, pension plans may integrate benefits or contributions according to a wage base, frequently at a fraction (e.g. 50%) of the SSWB. Plans can contribute a higher percentage to base salaries above an integration base. If that integration base

1599-551: The wrong thing to do. ... As for now, I believe this bipartisan plan is the right thing to do. It's the right thing to do for jobs. It's the right thing to do for the middle class. It is the right thing to do for business. And it's the right thing to do for our economy. It offers us an opportunity that we need to seize." At a press conference the next day, Obama strongly defended the compromise agreement, after numerous congressional Democrats had strongly objected to aspects of it. Obama labelled Republicans as "hostage takers" for forcing

1640-411: The year. The government keeps the $ 818.40 overage. Even if the employers become aware of the overpayment, there is no method to claim the overpayment. Several occupations are exempted from the current cap with a far lower cap, such as food service employees and domestic help employees. For the year 2014, the cap was $ 6,500 in wages. Since 1998, the SSWB has been: (*) The maximum employee share in 2011

1681-620: Was opposed by some of the most conservative members of the Republican Party as well as by talk radio hosts such as Rush Limbaugh and some groups in the Tea Party movement . It was also opposed by several leading potential candidates for the Republican nomination in the 2012 presidential election , including Sarah Palin and Mitt Romney , typically on the grounds that it did not make the Bush tax cuts permanent and that it would overall increase

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