FICA Taxes? Fully understanding the US tax code is like fully understanding quantum physics; nobody, even lifetime IRS employees, understand it all. Millions of employees have money taken out of their check each week, and while most know “it’s for taxes”, great numbers have little real understanding of what the FICA, FUTA, SUTA deductions are for, how they work, how they are calculated, etc. (been there and done that….. 🙂
In this article, we’ll cover FICA taxes. Hopefully by the end, we’ll have shed some light on things. A prevailing facet to understand related to Social Security, is that in 1960, the US Supreme Court decided in Flemming vs. Nestor, that no one has an “accrued property right to benefits from Social Security”. In other words, just because you are forced to put lots of your your money in, you have no right to get any of it back, ever. There’s no “opt out” option, you’re just in. — I’m not sure if any of the policy makers were active members of a New York crime family, but the tax system can sure feel like it. – Here we go.
FICA Tax (Social Security and Medicare)
FICA is collected under the Federal Insurance Contributions Act (FICA). The rates are set by law, and can only be changed via new legislation. FICA actually comprises two forms of tax. Social Security and Medicare. We’ll cover each in the following.
Social Security Tax
Social Security is funded via a 12.4% tax on wages. Half of it (6.2%) is paid by employees, and the other half by employers. Employers “match” the employee tax payments, so “self-employed” people pay the full 12.4%. Social Security tax is limited, in that it is only due on wages up to certain income level, known as the “taxable wage cap”. The cap is automatically adjusted upward each year, based on inflation, and the level is so high that it’s not even a factor for most middle class households.
Effective Jan. 1, 2019, the “taxable wage cap” increases from $128,400 to $132,900. As a result, for high earners, an additional $4,500 in earnings will be subject to Social Security tax. In other words, in 2019, an employed person earning $132,900 annually (the 2019 cap), will pay $280 more in Social Security tax, and their employer will pay an additional $280. If the person is self employed, they’ll pay the whole $560. — Over 175 million earners will pay Social Security taxes in 2019, with over 11 million of them earning over $128,400 annually, will be subject to the additional tax.
Medicare Tax
Medicare is funded via a 2.9% tax on wages. As with Social Security tax, payments are split between workers and employers with each paying 1.45%. (Self employed pay the whole 2.9%) There’s a couple important differences between Social Security and Medicare taxes:
1) There is no “taxable wage cap” on Medicare tax; it’s paid on every dollar earned.
2) Under a provision of the ACA (Affordable Care Act), the employee’s portion of Medicare tax is subject to an additional .9% tax, when earnings go above a certain point. Unlike the Social Security tax “wage cap”, which is increased annually to account for inflation, the added .9% tax thresholds are are not adjusted for inflation. The result is that, as earnings increase along with with inflation, more an more people will be paying that extra .9% tax. Once a person rises above the threshold for earnings, they start paying 2.35% in Medicare tax on every dollar earned. (instead of the standard 1.45% paid on earnings below the threshold)
The annual earning amounts that trigger the additional Medicare tax are:
Married filing jointly – $250,000
Married Filing individually – $125,000
Single and all others – $200,000.
Where’s all the money going?
The increased taxes paid in 2019, will help offset a 2019 2.8% increase in monthly Social Security and Supplemental Security Income benefits. The 2019 2.8% benefit amount increase is the the biggest jump in seven years. To account for economic changes and the adjustment of monthly benefits, the Social Security Act provides for “cost-of-living adjustments” (COLA), which are based upon increases in the “consumer price index”. While wages are going up, with tax revenues per taxpayer climbing accordingly, the simple fact is that these days, more people are retiring and receiving Social Security benefits, and more people are relying on SSI benefits as their primary source of income. More than 60 million people will receive Social Security and/or Supplemental Security Income benefits in 2019. The reality is that more people are receiving, and fewer people are contributing.
The 2019 max monthly Social Security benefit, for workers retiring at full retirement age, will increase $83. (to $2,861)
The average monthly Social Security benefit will rise $39. (to $1,461)
Hopefully, you’ve found the information above to be helpful. If, you’re an individual seeking employment or a company leader seeking assistance with employee on-boarding, and WorkSource can be of service to you, fill out the form below and we’ll contact you. — Thanks again and make it an awesome day!!!
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