The recently announced 3.6% cost-of-living increase in Social Security benefits scheduled for next year means a commensurate increase in the wage base used to calculate the tax. The yearly wage base, which has been $106,800 since 2009, will rise to $110,100 in 2012. Amounts of income above the threshold of the wage base are not subject to Social Security tax but are still subject to Medicare (which is uncapped).
If the Social Security tax returns in 2012 to its usual rate of 6.2%, after the special reduction to 4.2% in 2011, then this raising of the yearly wage base will be a meaningful tax increase of up to $2,341. However, the 4.2% rate may still be extended through 2012. (President Obama's proposal to cut the rate to 3.1%, half the regular rate of 6.2%, was defeated in the Senate last week along with the rest of his jobs bill.)
The growth of the Social Security wage base will affect the withholding for salary, bonuses, deferred compensation, and certain types of equity compensation, such as nonqualified stock options and restricted stock. The "Withholding" sections of the Tax Center at myStockOptions.com clearly explain the withholding rules for each type of equity compensation plus employee stock purchase plans. On our other website, myNQDC.com, the withholding rules for nonqualified deferred compensation are covered in the section Taxes: Reporting.
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