What We Know
3 Tax Changes for 2020 That Will Affect Most Taxpayers
“The difference between death and taxes is death doesn’t get worse every time Congress meets.”
As the end of the year inches closer, thoughts turn to family traditions … and taxes. Every year, there are changes to the tax laws. Some of these are beneficial and some — not so much. This coming year is no different. Here are a few important changes on the horizon that will impact many of us.
Higher Wage Cap for Social Security Tax
You might have noticed a list of tax contributions on your pay stub, but what do they mean? Let’s break it down. The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components: (1) a 6.2 percent social security tax, also known as old age, survivors and disability insurance (OASDI); and (2) a 1.45 percent Medicare tax, also known as hospital insurance (HI). For self-employed workers, the self-employment tax is 15.3 percent, consisting of: (1) a 12.4 percent OASDI tax; and (2) a 2.9 percent HI tax. OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.
Currently, the Social Security wage base is $132,900. This will increase in 2020 by $4,800 to $137,700. Thus, OASDI tax will apply only to the taxpayer’s first $137,700 in wages or net earnings. Taxpayers do not pay any OASDI tax on earnings that exceed $137,700. There is no wage cap for HI tax.
Maximum Social Security Tax for 2020
Next year we will see an increase in social security tax paid by both the employer and employee. In 2020, the annual contribution will go up by $297.60. For workers who earn $137,700 or more, the total contribution will be $8,537.40 ($137,700 x 6.2 percent) instead of $8,239.80. If you are self-employed and earn $137,700 or more, you will pay a total of $17,074.80 in social security tax ($137,700 x 12.4 percent).
Additional Medicare Tax
Higher-income workers may have to pay a 0.9-percent Additional Medicare tax. This tax applies to wages and self-employment income that exceeds $250,000 for married taxpayers who file a joint return, $125,000 for married taxpayers who file separate returns, and $200,000 for other taxpayers.
The annual wage cap does not affect the Additional Medicare tax. All wages are still subject to the 1.45% medicare tax for both employer and employee.
Questions about personal or business tax returns? Please contact us at firstname.lastname@example.org for more information.
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