Social Security Deduction Limit
A worker is going to have 7.65% of his gross earnings deducted from his paycheck to satisfy his FICA taxes. There is a social security deduction limit, but none for the Medicare portion of this tax.
The term FICA tax which appears on so many payroll check stubs is the source of a bit of confusion to some workers. The term is an abbreviation for the Federal Insurance Contributions Act and consists of a tax for Social Security benefits and a tax for Medicare which is a form of Government health insurance for retired workers. If your pay is subject to FICA withholding taxes, they are withdrawn from your paycheck by your employer and sent to the IRS each quarter. The IRS passes the money on to the Social Security Administration. There is a Social Security deduction limit, but none on the Medicare portion of the withholding tax.
The total amount of the FICA tax is actually 15.3% of your gross earnings. This is broken down into 12.4% for Social Security and 2.9% for Medicare. Employed workers, however, only have to pay half of this amount. The employer is required to pay the other half. This is a fact that many workers do not realize unless they become self employed and suddenly find themselves responsible for the entire amount. The actual deduction amount for the employed worker is 7.65% or half of the total tax due. This is broken down as 6.2% for Social Security and 1.45% for Medicare.
The breakdown amounts have more than just a curiosity value to many workers. This is because there is a limit set for earnings subject to Social Security Deductions. This limit is subject to change and is for the 2007 Tax year, it was set at $97,500. This means that when workers earnings reach that figure, the 6.2% is no longer deducted from his pay check. The 1.45% portion for Medicare has no such upper earning limit and you continue to pay it regardless of gross earnings total.
The self employed worker is responsible for paying the entire 15.3% amount. This is called a self employed workers tax, or SE tax. They are allowed to deduct 50% of the tax as an itemized deduction to compensate for the fact that their employed brothers are getting half of the tax covered by their employers. The $97,500 limit applies to them as well. Once they have earned that much within a tax year, the 12.4% for Social Security ceases to be owed. The 2.9% for Medicare, again, has no limit.
The self employed worker has to assume the responsibility for paying this tax quarterly or sending in estimated tax payments. The employed worker does not have this worry as the payroll department handles it. The employed worker is free from the paperwork. Nothing has to be filed as with Federal Taxes and no quarterly reports or payments must be made. All the employed worker has to do is mourn the missing money on his paycheck and wait patiently for his retirement to reap the benefits.