FICA Limit in 2013 – What’s Changing and Why

by Darwin on December 21, 2012

The FICA Tax that most Americans pay either through our routine W-2 paychecks or through self-employment taxes is set to change in 2013 in a few ways, so I thought I’d get you thinking about what’s coming and how it may impact your personal finances next year.  But first, a few basics:

What is the FICA Tax?

The Federal Insurance Contributions Act tax is levied by the federal government upon employees to fund the Medicare and Social Security systems; initially, in the 1930s, the US government instituted the FICA tax to fund Social Security as part of the new deal; subsequently, in the 1960s, Medicare was introduced and the tax rate increased accordingly.  The full tax is paid by both employees and employers in equal share as outlined below.

What is the FICA Tax Rate?

Under normal circumstances, over the prior several years before the recent payroll tax holidays Congress started enacting over the past few years (reducing the amount owed by 2%), both employee and employer had paid 7.65% of the employee’s salary (15.3%) up to an annual cap for the Social Security piece; at that point, the Social Security piece is no longer paid, but you continue to pay the Medicare portion since there is no cap for that.  If this is confusing, think of it as getting a 6.2% tax break (Social Security portion only) once you surpass the FICA income limit, so for every $1000 earned past the cap, you keep an extra $62 in that paycheck compared to the prior month’s paycheck when you were within the limit.

FICA Income Limit Explained:

The FICA income limit tends to increase each year based on annual inflation rates as determined by government inflation benchmark measures.  There was a period of no increases where 2009, 2010 and 2011 all saw the same $106,800 limit, which was an anomaly.  Years prior saw increases, with the 2008 limit being $102,000, 2007 having a limit of $97,500 and so on.  For 2012, the limit was set as $110,100.

Update December 2012: This Just In… For 2013, the FICA Limit will be $113,700. Based on my initial estimate below, this actually is a bit higher than the $112,500 I had predicted, but since we had a few years where the cap was flat and didn’t increase at all, I suppose higher earning Americans shouldn’t complain too much.  I say “high earning”, because once your income passes this cap, it’s almost like free money in each paycheck since you’re no longer paying a sizable portion of the total tax.  All 6 Figure earners should be subscribed to TheLadders of course, (I use the Free service option, it’s great) for email updates of 6-Figure jobs in their area delivered weekly.  It’s a great way to keep on top of what’s out there and what people are earning in the field.

As an example of the benefit to higher earning employees, let’s say you made $120,100 in 2012.  The final $10,000 would be untaxed, so 6.2% of $10,000 is an extra $620 in your pocket in your December paycheck.  Some people like to just increase their 401(k) contribution by a similar amount once they surpass the limit, put it into a Roth IRA, or simply use those funds for holiday gift season.  While many things are uncertain when it comes to trying to nail down your tax liability each year, at least you can predict what’s going to happen with your FICA tax portion each year, as the limit is normally announced in the Fall prior to the start of each calendar year.

 

What Will Likely Happen to the FICA Tax and Limit for 2013

The FICA income limit for 2013 has yet to be announced, but here are some predictions on both the limit and the tax rate to be paid:

2013 FICA Income Limit Estimate: I would anticipate a slight inflationary increase in 2013, so we might see a new limit in the $112,500 range.

2013 FICA Tax Rate: Normally, the rate is 7.65% in total, and 6.2% for the Social Security portion but it has been reduced by 2% to 4.2% over the past few years as part of what was supposed to be a payroll tax holiday to help with the economic recovery following the Great Recession.  However, once politicians give their constituents something, it’s hard to take away (like how the Bush tax cuts were set to expire but keep being renewed and then called a “tax hike” if they are allowed to lapse).  Therefore, I envision as part of the preparation for the “Fiscal Cliff” coming up at the end of 2012, there will probably be calls to further extend the payroll tax holiday for another year.  If nothing happens, the rate will revert to 6.2% and everyone will see an increase of 2% over what they paid this year up to the cap, but I’d put decent odds on holding the 4.2% rate, especially to be timed prior to the election.

Once the IRS publishes the confirmed FICA tax cap for 2013, I’ll be sure to go back and update this article with, so be sure to subscribe to email or various social media platforms in the sidebar or below.

 

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