It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

W is for Wage Base.

Wages and self-employment income are subject to Social Security and Medicare taxes. Together, Social Security and Medicare taxes are known as FICA (Federal Insurance Contributions Act) taxes and are taken right out of your paycheck. Taxes on self-employment income are separately referred to as SECA (Self-Employment Contributions Act) taxes since self-employed persons pay both the employee and employer contributions.

If you’re employed, you pay Social Security tax (6.2%) as the employee, and your employer also pays the same rate of tax (6.2%); again, if you’re self-employed, you pay both portions.

Social Security taxes are subject to a cap. In other words, you pay Social Security taxes on your earnings until you hit a magic number. After that, your wages are no longer subject to Social Security taxes. For 2020 that magic number – known as the wage base – is $137,700. That means that whether you made $1,000 or $100,000, you will pay Social Security taxes on that income. But if you earn $137,701? You’ll pay Social Security taxes on $137,700, but not on the extra dollar. And if you earn $1,137,700? You’ll pay Social Security taxes on $137,700 but not on the extra million.

In contrast, Medicare taxes are not subject to a cap: you pay Medicare taxes on all of your earnings.

You can find the rest of the series here:

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Kelly Erb is a tax attorney, tax writer and podcaster.

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