The 2014 FICA Tax: What’s New

iStock_000000110345_L1For wages earned in 2013, the FICA tax rate will be  15.3%.  However, that doesn’t mean  15.3% of your paycheck will be withheld for Social Security and Medicare taxes.  Only half that amount (7.65%) will be taken out because your employer pays the other half.

If you are self-employed then you pay both halves.  Any money you make over $113,700 for tax year 2013 will not be subject to Social Security taxes.

You’ll be doing your 2013 taxes in 2014, when W2, 1099s and other IRS tax forms become available for the just-closed tax year.  One change for the 2014 FICA tax is that there is now an Additional Medicare Tax.

What’s New for 2014: the Additional Medicare Tax

Any wages earned after January 1, 2013 will be subject to an additional Medicare tax if their wages surpass a certain threshold.  For 2013 tax year, which you’ll be preparing in 2014, any wages over $200,000 will be subject to extra tax.  It’s 0.9% of anything over the threshold.  There is no limit to the wages that are now subject to the Medicare Tax.

The entire 0.9% of the Additional Medicare Tax is paid through withholding.  The employer doesn’t pay half, as is done in the other FICA taxes.  The employee pays the entire 0.9%.

The Wage Base Limit for Social Security Tax

Social Security taxes are 12.4% of your wages, but only up to a certain amount of wages.  (12.4% is split between you and your employer).  For figuring the 2014 FICA tax (for wages earned in 2013), the limit is $113,700.  That means any wages earned over $114,700 will not be subject to Social Security taxes.  This threshold is called the wage base limit.  This changes every year, rising to keep up with inflation.

To find out the current FICA tax or the wage base limit, you can always consult the latest version of IRS Publication 15, (Circular E) Employer’s Tax Guide.  It’s the complete guide for Employers who must figure out how much withholding to take out of their employees’ paychecks.  It has all the FICA information that’s necessary.

 

 

It’s a Game of Wait and See: The 2013 FICA Tax

This is it, folks: Congress will decide in the next few months whether our FICA tax will stay at 5.65% or go back up to 7.65%.

What are these FICA Tax Rates Again?

Let’s review what exactly these numbers stand for.  First of all, the FICA tax is actually two taxes rolled into one:  Social Security tax and Medicare tax.  The FICA tax is also called the payroll tax.  It’s taxes that are used to take care of the elderly, and that includes you when you retire.

Who Pays the FICA tax?

The FICA tax is shared by employees and employers.  If you are your own employer, then lucky you, both parts are your responsibility.  Here’s how it’s broken down:

  • 2012 (and maybe 2013) Social Security Tax rate: 4.2% (employee’s share)
  • Social Security tax: 6.2% (employer’s share)
  • Medicare tax rate: 1.45% (each half)

If Congress doesn’t extend the reduced Social Security tax rate for employees, that will go back up to 6.2%, matching the employer’s share once again.

 

Fica Tax Rates

FICA tax rates had been unchanged for years but for 2011 there was a big change.  The employee portion of the FICA tax was reduced by 2% and then extended into 2012 as well.

FICA tax rates have been a hot topic for a few years, and some say the FICA (Federal Insurance Contributions Act) cuts will defund Social Security.  Social Security is supposed to be self funding so cutting the FICA tax rates muddies the waters a bit.  The losses taken as a result of the cuts in the 2011 FICA tax rates were made up by funds from general federal revenue, whatever that is.

By extending the FICA tax rate cuts, a new source of funding will have to be found.  President Obama proposed a new tax on millionaires.  Some want cuts in spending.  Some even think the cuts in the FICA tax rates will be permanent since it’s hard to restore things like this to their previous levels.

 

The 2011 Fica Tax

Tax season is almost over, with individual federal income taxes due April 17, 2012 for taxes paid on the year 2011.  Lots of of changes on the books this year, most interestingly of all is the cuts in the 2011 FICA tax.

FICA is a federal tax paid out of any salary wages.  In other words, if you got a W2, you paid some FICA taxes.  This tax goes towards things you’ll presumably need in old age, such as old age benefits and health care.

For twenty years the Social Security portion of the FICA tax has been 6.2%  (remember, FICA tax is Social Security tax plus Medicare tax). The 2011 FICA tax was lower by 2% because the Social Security portion was 4.2% for a temporary time period.

The 2% cut in the 2011 FICA tax is for employees who received a W2 statement.  Only employees receive the break.  The employers’ portion of Social Security taxes did not receive a break so it remains at 6.2%.

Self-employed taxpayers will also receive the 2% tax break in their 2011 FICA tax.

The Social Security program is run by the Federal Government and is called Old-Age, Survivors, and Disability Insurance (OASDI).  The Medicare program is also fun by the Federal government and is officially called Hospital Insurance (HI).

The other portion of the 2011 FICA tax, Medicare, is still 1.45% for both employees and employers. In 2013 the Medicare portion will go up by .9% for earned income exceeding $200,000 for individuals and $250,000 for married couples filing jointly.

What is the FICA Tax?

To help you understand what the FICA tax is, let’s take a step back and look at the typical paycheck.  First of all, anyone who earns money at a job will see FICA tax taken out of the paycheck.  Whether you’re paid by the hour or a salaried employee, or you own your own business, you’re paying half and your employer is paying the other half of what’s owed in FICA taxs to the IRS.

FICA tax is your payment into services you’re probably going to need when you’re retired.  It’s social security and Medicare payments.  The money taken out of your paycheck for the FICA tax is going towards today’s retirees receiving social security and Medicare.

FICA tax is 15.3% of your income.  Well, it’s 12.4% for social security tax and 2.9% into medicare.  The social security contribution has a limit of around $106,800 (it changes each year…that’ what it was for 2010).  If 12.4% of your income is more than than $106,800, you pay only $106,800.

If you don’t own your own business but rather work for someone else, you will only pay half of these percentages.  That means you will be paying 7.65% of your income for the FICA tax.  Your employer pays the other half.

If you are a business owner and your salary comes from your own business well that means you’ll be paying both halves of the FICA tax.   This is sometimes called the self-employment tax.  At least the business can deduct its portion.

The FICA tax is automatically taken out of  your paycheck if you work for someone else.  If you own your own business or anticipate receiving lots of money from the sale of a home or from investment, you might have to pay your FICA tax quarterly.  This is called making estimated tax payments.

Quarterly estimated payments are due four times a year…the 15th of April, June, September and January.  Estimated FICA tax payments are hard to calculate so lots of people make use of a tax professional or at least a guidebook or two.  There are IRS publications created for this purpose but can be difficult to interpret sometimes.  In fact, sometimes you need a tax professional just to interpret the IRS publications.

FICA tax is a result of the Social Security Act of 1935 and provides a financial safety net for retired persons.  The Federal trust fund into which all FICA tax payments go also provides disabllity insurance in addition to retirement income and Medicare coverage and benefits for survivors (for example, the widow of someone who was receiving Social Security benefits).

The name of the trust fund is the Social Security Trust Fund and boy oh boy is it in trouble lately.  It’s managed by the US Department of Treasury, which invests in government securities to maintain it.  Basically, the US Government loans the FICA tax money out to itself and uses the money to finance other wings of the government or projects outside the realm of Social Security.  The loans are paid back when bonds come true.

If you make too much money in retirement while receiving social security benefits, the IRS will tax you on 85% of your social security income.  So now you’ve come full circle and your’e paying taxes on money you saved via the FICA tax…essentially paying taxes on taxes!