I hate to be the bearer of bad news but it looks like your Social Security taxes could be going up next year. This is according to a recent announcement by the Social Security Administration. Let's walk through what the increase is, as well as how you can still find some tax relief.
Everyone who works must pay Social Security taxes to help fund the Social Security retirement system. Employees pay a 6.2% Social Security tax on their salaries, up to an annual wage ceiling. Employers pay a matching amount. If you're self-employed, you must pay the entire tax yourself. That can be 12.4% on your next self-employment income up to the ceiling.
The tax wage ceiling for 2017 will be $127,200, a 7.3% increase from the $118,500 in 2015 and 2016. This is the largest one-year increase in the ceiling in over 30 years.
This could have a major impact on you if your net income from self-employment for 2017 is equal to or greater than $127,200. This means you may have to pay $1,079 more in Social Security tax in 2017 than in 2016 – $15,773 in 2017 compared to $14,694 in 2016.
The key phrase here is "net income from self-employment." You only pay Social Security taxes on the profits from your business after deducting your expenses. That's why it's so important to maximize your deductions to limit your tax liability.
The mileage deduction can lead to significant tax savings. Many self-employed workers drive a personal vehicle for business purposes and the government allows you to deduct 54 cents for every business mile (in 2016). Those miles can quickly add up but only if you keep track.
Some other common deductions that may help you avoid the new Social Security tax income limits include the home office deduction and the business expense deduction. Be sure to follow the rules on both of these, as the IRS keeps a watchful eye on these often-abused deductions.