Social Security Wage Base Increase: Impact on Equity Compensation
Given the announcement today (October 19th) that there will be a 3.6 percent cost-of living increase in Social Security benefits next year, this triggers a similar increase in the wage base used to calculate the tax. The wage base, which has been the same since 2009, will increase to $110,100 in 2012 from $106,800. For SSA announcement see: http://www.ssa.gov/pressoffice/pr/2012cola-pr.html
It remains unclear whether the special tax rate of 4.2% for 2011 will be extended to 2012. Unless extened, it would go up to 6.2%. The proposal to drop it in 2012 to 3.1% in the newest jobs bill was recently defeated.
This impacts the withholding next year for salary, bonuses, and certain types of equity compensation where there is Social Security withholding, such as nonqualified stock options and restricted stock. For more on withholding rules, see the relevant Tax Center subsections ( http://bit.ly/9rI8R1 ) on myStockOptions.com.
Bruce Brumberg, Editor
| Topic | Replies | Likes | Views | Participants | Last Reply |
|---|---|---|---|---|---|
| Tax Return Extensions | 1 | 0 | 295 | ||
| New CEP CE Course on Taxation | 0 | 0 | 217 | ||
| Tax Return Changes & Reporting Resources Related to Stock Comp | 0 | 0 | 260 |
Thanks Bruce! You are always helpful with the most up to date information.
Hi Bruce, do these tax changes have any impact on whether a stock option recipient should exercise and sell before the end of the year?
Bill, The strategies you ask about would concern the execise with NQSO at year end. Sales are not yet included in the FICA calculation, but will be in 2013.
We have good selection of articles and FAQs in Financial Planning: year-end planning section (see: http://bit.ly/dgTv9O) on www.myStockOptions.com.
Among the ideas covered related to your question:
If your income at year-end already exceeds the Social Security wage base for the year ($106,800 in 2011 and $110,100 in 2012), by exercising nonqualified stock options or stock appreciation rights in December you can avoid Social Security tax. If you wait until January, your wage base for the year starts at $0 (and will be higher in 2012), and the 6.2% Social Security tax will again apply on the exercise spread and the vesting value of restricted stock up to the new maximum for that year.
The most meaningful provision in the 2010 Tax Relief Act was the 2% cut in the Social Security tax rate, from 6.2% to 4.2% (Medicare remains uncapped at 1.45%). This reduced the Social Security tax maximum from $6,621.60 to $4,485.60, a savings of $2,136 ($4,272 for married couples). If your annual income is under the Social Security wage-base maximum ($106,800 in 2011), then exercising NQSOs before the end of 2011 will let you benefit from this 2% reduction, as the Social Security rate will return to 6.2% in 2012 unless Congress extends it.
This answer is from part of the FAQ:
What are some year-end strategies for restricted stock and stock options? http://www.mystockoptions.com/faq/index.cfm/catID/A44093AE-7361-46FA-8F5071B0A481BEAC/ObjectID/D943A565-30A9-11D4-B9080008C79F9E62
What do you think the chances are of Congress extending the 2% discount? My payroll seems to this it will.
You asked about the chances of an extension of the 4.2% rate (standard is 6.2%). Last week the Senate defeated a bigger reduction to 3.1% in the Jobs bill, see:
http://www.suntimes.com/news/8165211-418/republican-senators-vote-to-kill-obama-jobs-bill-tax-increase.html
Does your payroll department have any insights for its opinion? Congress does at very end of year pass various tax bills and perhaps this will get extended. It will likely come up for a vote on its own (not part of another bill), so that both parties and the President can take a clear position on it for campaigning. I find it interesting that voting against it is positioned by some as a "tax increase."
That lower rate can just continue to hurt the solvency of the Social Security system?. If you're interested in Social Security topics, including when to claim it, I've gotten involved with a new website at www.SocialSecuritySolutions.com .
What's important for stock plan administration is to be prepared for either rate. Early in the year exercise of NQSOs, vesting of restricted stock, and delivery of performance shares will need to use whatever rate applies without any grace period for your systems. Even the top executives will have this Social Security tax apply until up the income cap.
Bruce Brumberg, Editor
www.myStockOptions.com and www.myNQDC.com
Thanks Bruce.