The Joint Committee on Taxation supplied a Description of the Social Security Tax Base to the House Ways and Means Social Security Subcommittee on June 21, in advance of hearings now underway. The report contains no surprises, but it does remind readers of key information about the social security taxes that may be deemed motivating by lawmakers as they consider the ongoing financial situation, both generally and in connection to Social Security.

1983

Changes made in 1983 marked a watershed in social security history. The tax rates were increased, additional groups of employees were brought into the system, the cap was taken off the hospital insurance tax and social security benefits became subject to the income tax. Although not discussed in the report, these changes produced substantial excess revenue not needed for current social security expenses. At the same time, the regular income tax was indexed for inflation, meaning that automatic tax increases that had previously taken place due to inflation of earnings were reduced. The combination of these factors and others meant that for the next two decades, excess social security taxes financed budget deficits in many cases.

Exceptions

The report lists about 15 types of compensation that are not subject to the social security taxes. It lists about the same number of types of employees that are not subject to the tax. These listings present potential targets for Congress to eliminate in search of additional revenue, without appearing to raise the tax rate.

Unearned Income Medicare Contribution

Beginning in 2013, a new 3.8-percent tax will be levied on net investment income for joint returns with a threshold adjusted income of $250,000. This tax does not specifically fund any social security payments.

Worker Classification

The report’s longest section addresses worker classification. In 1978, Congress effectively froze worker classification in existing industries, meaning that, today, many workers are treated as independent contractors who otherwise might not be so treated under the common law test.

S Corporations and Partnerships

The report describes how S Corporation shareholders may avoid social security taxes by characterizing their income as corporate earnings passed through to them, and how the courts are in conflict over this issue. Similarly, limited partners of partnerships (and members of LLCs) may not be subject to self-employment taxes on all earnings.

Taxability of Benefits

The report explains how the 1983 changes did not totally subject social security benefits to the income tax.

Conclusion

The JCT Report draws no conclusion from this information; however, the import of the report is clear: It lays out a roadmap for the House Subcommittee from which it might choose measures to increase social security tax revenues. The report does not deal with social security benefits, but proposals already exist to reduce or delay benefits. It remains to be seen what the Subcommittee will do with these possibilities.