California, Social Security and limits, Oh My!

Q. I am employed in the State of California and am curious to know what the tax limits and cutoffs are for Social Security and California SDI Payroll Taxes.

A.  This question is a little more technical than I usually like to go.  But there is common value and in this question and a possible tax planning opportunity available so here we go!

Social Security and Medicare are two taxes that should be withheld from every employee’s paycheck no matter who you work for.  Many employees are incorrectly classified as independant contractors just so the employer does not have to do any “extra work” by withholding.  I’ll discuss that issue in a future edition of this blog.  According to Publication 15, the oft mentioned IRS withholding guide, Social Security is to be withheld at the rate of 6.2% and Medicare at the rate of 1.45% of taxable wages.  For Social Security purposes, taxable wages means gross pay minus pre-tax deductions up to $102,000 for 2008.  Each year, this limit increase based on calculations of inflation done by the Treasury Department I believe.  Medicare has no maximum income level.  You will pay 1.45% of all wages towards that tax.  For 2008, the Social Security limit in place means you will pay a maximum of $6,324 towards that tax.  Keep in mind that your employer matches your contribution.  You then get $12,648 towards your Social Security “account”.  In the 2008 presidential election, both major party candidates have ideas about how they wish to change that calculation.  It will be interesting to see the result.  You can always find the current rates and wage bases for Social Security and Medicare in Publication 15.

For those who have employees in the state of California, there is another wage-based tax called State Disability Insurance (SDI).  The rate for 2008 is .8% of taxable wages up to $86,698.  This means a maximum tax of $693.58.  The latest information on this tax and all other California withholding taxes can be found here.

Now for the tax planning part.  If you happen to hit the wage base for Social Security, SDI or any other tax of this type, you may wish to increase your 401(k) or HSA withholding by that same amount if you have not reached the limit for the year.  Think of the possibilities!  You can contribute to yourself and will not have any extra out-of-pocket cost.  In fact, you can save on your tax bill by increasing these contributions.  Check with your CPA or tax planner to make sure you don’t go over the maximum contributions for your 401(k) or HSA for the year as this could lead to other no-so-good situations.

No Comments

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a comment

You must be logged in to post a comment.