Now that we’ve covered the basics of what gets deducted from your paycheck, it’s time to dive a little deeper into the individual parts. One of the most common questions people ask when they receive their first paycheck, or when they take a good look at their paystub, is, “Who is FICA, and why are they taking all of my money?”.
What is FICA?
The Federal Insurance Contributions Act is the federal law that requires you to withhold two separate taxes from the wages you earn. It includes Social Security Tax and Medicare Tax at a flat percentage rate. The Social Security Tax is 6.2% rate of your wages, and the Medicare Tax is 1.45% of your wages. If you earn more than $200,000, you will also be taxed an additional 0.9% Medicare surtax.
You’re not the only one paying for FICA, however. Your employer is also matching the Social Security Tax of 6.2% and the Medicare tax of 1.45% of your wages. This is extremely important to understand if you are an independent contractor, as you will be responsible for paying on your wages earned, and matching that amount, as you are your own employer. In other words, you are responsible for paying the entire 12.4% Social Security tax, and 2.9% Medicare tax.
Wage caps and floors:
Social Security Tax is subject to a cap, which is adjusted every year for inflation. In 2014, the maximum amount of taxable earnings is $117,000. This means that if you make $118,000 in 2014, you will only be taxed the 6.2% on $117,000 of your wages. A common question asked about this is, “What if I have more than one job and make over $117,000 combined – should my employers both continue withholding the 6.2% for Social Security?” Sam Kerch of AskCPASam answers, “This is an extremely popular question. Each employer of record is required to withhold 6.2% of your taxable wage for Social Security purposes up to the annual limit. Even if you have 5 jobs at once, each employer is required to withhold this amount.” He continues to explain that, “while neither of your employers will stop withholding from your paycheck, you are eligible for a refund on your tax return if the total amount of Social Security tax paid during the year was more than the maximum amount required.”
There is not a wage cap on the 1.45% tax you pay for Medicare Tax. In fact, as mentioned above, if you make over $200,000 you will be taxed an additional 0.9% Medicare surtax.
How does this benefit me?
Now that you understand more about the dollar amount and percentages you’re paying, let’s talk about what you’re actually paying for. In general, Social Security and Medicare provide benefits for retirees, the disabled, and children of deceased workers. More specifically, Social Security benefits include old-age, survivors, and disability insurance. Medicare, however, provides hospital insurance benefits for the elderly.
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These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.