Ever wonder what exactly is getting taken out of your paycheck each month under the acronym FICA? Here’s what you need to know:
FICA (The Federal Insurance Contributions Act) taxes are paid by both the employee and the employer and used to fund the Social Security and Medicare Programs. They are two separate taxes – something many individuals do not know.
The tax rate for Social Security and Medicare is based on the employee’s taxable earnings. Currently, the rate for Social Security is 6.2% from the employee’s earnings and 6.2% from the employer. For Medicare, the current rates are 1.45% (employee-contribution) and 1.45% (employer contribution).
Social Security tax has a wage base limit. The limit is determined towards the end of each calendar year for next year. For 2014, the base is $117,000 (in 2013 it was $113,700). What does this mean to you? All taxable wages up to $117,000 for each employee are subject to the tax. Once an employee earns more
than the annual wage limit, there are no more Social Security taxes withheld for the remainder of the calendar year. If you are interested, check out this link to the Social Security website, which shows how the limits have increased over time. http://www.ssa.gov/OACT/cola/cbb.html
Unlike the Social Security tax limit, there is not a wage base for the Medicare tax, so all wages earned are subject to the Medicare tax.
In addition, there is an additional Medicare tax that applies to any wages earned in excess of $200,000 in a calendar year. Once an employee earns more than $200,000 in a calendar year, s/he has an additional 0.9% withheld for Medicare tax through the end of the calendar year. The additional 0.9% is only charged to the employee, not the employer.
For more information regarding FICA taxes, please see the 2014 Publication 15 (circular E) manual on the IRS website. http://www.irs.gov/publications/p15/index.html
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