Each year, the government bumps up the maximum
social security taxes that you can pay. For 2007, the maximum
wage base jumps to $97,500, an increase of $3,300 over the 2006
max of $94,200.
At a rate of 6.2%, the maximum social security taxes that your employer will withhold from your salary increases by $204.60, from $5,840.40 in 2006 to $6,045.00 in 2007. In addition, your employer also withholds Medicare taxes from your pay at a rate of 1.45%. There is no limit on your wages subject to this tax.
Calculating the Self-employment Tax:
If you're self-employed and earn more than $400 in net profit from your business, you're subject to social security and Medicare taxes as well. Known as the "self-employment tax", you'll need to complete a Schedule SE to calculate this tax, and then report the amount due on page 2 of your Form 1040.
The self-employment tax is based on a social security tax rate of 12.4% and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee's portion and the employer's portion of both taxes. Remember, when you work as an employee, your employer matches the social security and Medicare taxes withheld from your pay.
Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes. If you earn income as an employee and as an independent contractor, and your combined income exceeds $94,200 in 2006, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and you'll end up overpaying your self-employment taxes.
Do You Work For More Than One Employer in 2006 and Earn More Than $94,200?
For 2006, each of your employers will withhold social security taxes from the first $94,200 that you earn from them. If you work for more than one employer and your total salary from all sources exceeds that threshold, you'll have excess social security taxes withheld. Make sure to claim a credit for these excess taxes on your 1040 as additional federal taxes paid in.
Let's say you work for two employers and earn $75,000 from each employer. Employer #1 will withhold $4,650 in social security taxes ($75,000 * 6.2%). Employer #2 will also withhold $4,650 in social security taxes - for a total of $9,300 in social security taxes withheld during the year. Since the maximum social security taxes that you should pay through payroll withholdings for 2006 is limited to $5,840.40, the excess of $3,459.60 counts as additional federal income taxes paid in by you.
A great place to find out more about your social security taxes and projected benefits is at the Social Security Administration's website located at www.ssa.gov.
FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:
2007 wage base max: $97,500
Contributing to a retirement plan is one of the best tax shelters available to you during your working years. Recently, the IRS announced that most of the retirement savings limits will increase for 2007.
Most working professionals have access to a 401(k) plan or a 403(b) plan at work. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. For 2007, you can contribute up to $15,500 into a 401(k) or 403(b) plan through salary deferrals.
Looking to set your 2007 monthly budget? To max out your 401(k) or 403(b) salary deferrals next year, instruct your employer to withhold $1,291.67 per month from your pay.
Anyone 50 or older by December 31, 2007 can contribute an extra $5,000 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $20,500, or $1,708.33 per month.
Many smaller employers offer their staff access to SIMPLE/IRAs instead. SIMPLE's work just like 401(k) plans, which means it's up to you to fund the bulk of this retirement savings account through salary deferrals. For 2007, the maximum contribution into your SIMPLE is $10,500, or $875.00 per month. Anyone 50 or older by December 31st can sock away an additional $2,500 in 2007, for a total annual contribution of $13,000, or $1,083.33 per month.
Are you self-employed? Each year, you can contribute up to 20% of your net self-employment income into a SEP IRA. The maximum contribution for 2007 is $45,000, or $3,750 per month.
Solo 401(k)'s are an attractive alternative to many sole proprietors and business owners with no full time employees who work more than 1,000 hours per year besides a spouse. If you don't have access to a 401(k) or 403(b) plan through another employer, the Solo 401(k) plan makes it easier for you to hit next year's max of $45,000. If you're 50 or older, your maximum contribution into a Solo 401(k) jumps to $50,000, or $4,166.67 per month.
And don't forget about IRA's. Even if you're covered under a retirement plan at work, you and your spouse can each contribute up to $4,000, or $333.33 per month, into a traditional IRA or Roth IRA next year, as long as your combined wages and net self-employment income exceeds the total amount contributed. Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $5,000, or $416.67 per month.
Most people won't be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2006 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2007.
2007 Maximum Retirement Account Contributions
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