On October 19, 2011, the Social Security Administration announced that the wage base for computing Social Security tax will be increased from $106,800, to $110,100 in 2012. This is the first increase in three years and is attributed to an increase in average total wages.

FICA tax is a combination of two taxes; the first one is OASDI (Old Age, Survivors and Disability Insurance), and the second is for hospital insurance. They are commonly referred to as Social Security tax and Medicare tax, respectively. It is the Social Security tax, currently paid at 6.2% by employers and withheld from employees at 4.2%, that is subject to the annual wage base. The Medicare tax, which is assessed at 1.45% to the employer and employee, has no annual limitation; therefore this tax may continue to be paid by employers and withheld on an employee, after the employee reaches the annual wage base.

Remember to order your payroll update from your accounting software provider, or make the adjustment when updating your tax tables for 2012. There is no official word yet, but the current Administration has called for further reductions of Social Security tax for both employer and employee for 2012, in an effort to stimulate the economy. If nothing changes however, Social Security withholding tax will likely return to 6.2% instead of remaining at 4.2%. As we approach the New Year and continue to stay abreast changes, consider contacting one of our staff professionals if you are in need of consulting or payroll services.

Circular 230 Notice: If this communication contains tax advice, this advice was not intended to be used, and cannot be relied upon by anyone, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.