Social Security “Recapture” Tax is dumb

Warning: This post is going to be full of math. This is not a political post – this is a math post.

For the first two months of 2012, Social Security Tax is 4.2% of your wages and for the remaining months, it will be 6.2%. The wage at which you stop paying Social Security Tax for 2012 is $110,100. [1]

I would thus expect that the maximum Social Security Tax that I will pay is as follows:

  • January/February: $110,100 / 12 * 4.2% = $385.35
  • March through December: $110,100 / 12 * 6.2% = $568.85
  • Overall total = $6,459.20

Since I will receive my first quarter bonus in one of (January, February), I will only pay 4.2% Social Security Tax on it, as will I on my January and February paychecks, despite these totaling almost $30,000 at my current calculations. Over the course of the year, I will still pay the $6,459.20 in Social Security Tax that I owe throughout the year, according to my calculations.

What exactly is the purpose of the new “recapture” provision of the tax law? It is suggesting that I will owe approximately another $176.41 at tax time come April 2013 simply because my first quarter bonus was paid out in one of (January, February).

Doesn’t this “recapture” provision defeat the whole purpose of phasing out the tax at the earnings level of $110,100? Those of us earning more than $110,100 in the year will not see Social Security in our old age past that earnings amount, so why I am being forced to pay more into Social Security than my math suggests? Is my math wrong?

[1] http://www.irs.gov/newsroom/article/0,,id=251650,00.html

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7 thoughts on “Social Security “Recapture” Tax is dumb

  1. Well, my professional opinion is that it isn’t dumb. They want to help lower earners who are more likely to spend that money, boosting the economy. They’re also going to hit some higher income earners who would have saved that money instead but aren’t thinking ahead about next year’s taxes. That’ll help the economy a bit too.

    Social Security is about making sure old people aren’t dying in the streets. Lowering taxes is about boosting economic activity. High earners (and their saving) and “fairness” are not really a priority. “Fairness” is much too expensive for government to worry about.

    Besides, the whole IRA/401(k)/403(b) system is set up to favor higher income earners. It is crazy how much money I can save that is tax-advantaged. If I earned more I could save even more. As a high income earner, I really can’t complain. I am going to be doing just fine in retirement no matter what happens with Social Security, and if it means I don’t have to take care of my (DH’s) poor relatives I’m ok with SS staying focused on the needs of lower income earners.

    My unprofessional opinion is that the tax recapture is annoying. But professionally, it isn’t dumb. It’s actually pretty well-designed from an economic standpoint, just irritating from a personal standpoint.

    • Perhaps “annoying” was the correct word and not “dumb”. I’m curious to see how the implementation of the recapture provision rolls out.

      I personally don’t care whether it’s 4.2% or 6.2%. The extra 2% each month is nice, but really not necessary. I understand that Social Security is to help the old people who would otherwise die in the streets and I was actually glad that it was going back up to 6.2% – the people relying on Social Security income need it far more than I do.

      I also think that it’s weird to leave it in for the first two months of the year, but not the rest of the year. Judging from some of the comments on Donna’s post at Get Rich Slowly the other day, a lot of people didn’t even know that there was a 2% decrease in the Social Security Tax in 2011 and probably would think that resetting it to 6.2% would be an increase in taxation.

      • The two months thing is just political theater– the different parties with use an extension as a publicity tool during an election season in order to broker deals with each other or gain political capital, just like this last extension was. That’s why politicians suck.

        I’m hoping turbo-tax will automatically figure out the recapture thing.

        With these tax decreases– the small incremental not knowing kind leads to more spending than the big lump sum like the original Bush tax cuts. Politicians get a lot less credit for for the little decreases because people like big checks that they notice, but empirically the small payroll tax decreases are a better boost to the economy.

        The idea, of course, being that they keep taxes lower until the some measure of economic recovery. Who knows what their benchmarks are. Unemployment is still down, but the economy as a whole is slowly on the mend.

  2. Yes your math is wrong or you misunderstood. When you earn your $30k in the first two month, they don’t know whether you will earn more than $110,100 for the year or not. They can’t just have you pay 4.2% on $18,350. Otherwise if you quit in March and not work again, they only got SS tax on $18,350, not $30k.

    So you will pay 4.2% on the $30k. When you earnings max out at $110,100, say in October, they have to stop withholding SS tax from you. So you end up paying 4.2% on $30k, and 6.2% on $80,100.

    $30,000 * 4.2% + $80,100 * 6.2% = $6,226.20

    That’s *less* than $6,459.20 you thought you should pay.

    The recapture tax brings it back to $6,459.20, exactly what you wanted.

    • Thanks, TFB.

      The basis for my math was wrong – I assumed that the maximum was calculated as the maximum social security tax, not the maximum taxable earnings. In my spreadsheet, the amount I’ll pay out of my paychecks over the course of the year is now closer to the number you calculated, rather than my original calculation.

  3. Your math is fine but you misunderstand the point of the recapture tax. $110,100 is the wage base limit for SocSec tax. That is an annual limit; it applies to the total of wages paid in the year. As an extreme example, if you were paid $110,100 in the first two months of the year, you would pay only 4.2% on that total amount. But if you were paid $110,100 over the entire year, you would pay 4.2% on the wages paid in January and February, and 6.2% on the wages paid the remainder of the year. Same wages but different tax, depending on the timing within the year. To try “leveling the field” and insure that the total SocSec tax paid in the year is constant regardless of how the wages are spread over the year, the $110,100 wage limit was spread over the 12 months and the wages paid in excess of the prorated wage limit in the first two months are taxed at the higher rate.

    As a payroll professional, I’ll say this whole partial-year tax rate reduction is an administrative nightmare. If this thing doesn’t get extended for the whole year, my world will be in a whole lot of hurt. I have no idea how people (or the IRS) are supposed to know when the recapture will apply, since we do not report wages by month on Form W-2. I see huge reporting burdens coming out of all this. Great job, Congress — why would businesses want to hire more people when they will have to deal with BS like this?

    • Thanks for the clarification – that makes a lot more sense. I still (like you) don’t get how the recapture exactly will apply since my W-2 just states my overall income for the year. My W-2 does show how much Social Security Tax was withheld though, so they can figure out from that how much I should have paid and charge me the difference at tax time.

      Wow, I’m glad I’m not a payroll professional. I hope for your sake that this gets extended for the whole year!

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