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SK Financial CPA Letter explains recent developments that may affect a client’s tax situation

Dear Client:The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.Social security taxes going up next year. All employees and self-employed persons will face higher social security taxes next year due to an expiring tax break. Higher earners may also face increased tax because the Social Security wage base is increasing to $113,700 from $110,100 and a higher Medicare tax applies to higher earners.The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).For 2013, the FICA tax rate for employers is 7.65% each6.2% for OASDI and 1.45% for HI. For 2013, an employee pays:

(a) 6.2% Social Security tax on the first $113,700 of wages (maximum tax is $7,049.40 [6.20% of $113,700]), plus
(b) 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
(c) 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

By contrast, for 2012, the OASDI rate for employees is 4.2%; the OASDI rate for employers is 6.2% and the HI rate for both employers and employees is 1.45%.

For 2013, the self-employment tax imposed on self-employed people is:

  • 12.4% OASDI on the first $113,700 of self-employment income, for a maximum tax of $14,098.80 (12.40% of $113,700); plus
  • 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return), , plus
  • 3.8% (2.90% regular Medicare tax + 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).

By contrast, for 2012, the self-employment tax rate is 13.3%: 10.4% for OASDI, reflecting the two percentage point drop in the OASDI rate for employees, plus 2.9% for HI.

By contacting us, we can tailor a particular plan that will work best for you.

Very truly yours,

Shams Khan, CPA, CFP

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