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 Payroll taxes for Social Security benefits are collected under the authority of the Federal Insurance Contributions Act or FICA. Most people simply refer to these taxes as FICA tax. This tax had its origins back in 1935 when the tax was part of the Social Security program.
What are FICA Taxes?
When the tax provisioning portion of the Social Security Act - Title VIII - was taken out of the program in 1939, it was placed into the Internal Revenue Tax code. At that time a more descriptive name than Title VIII was needed so the tax was renamed as the Federal Insurance Contributions Act or simply FICA. To this day, FICA remains the tax collection mechanism for Social Security.
FICA today is used to provide for the federal system of old age, survivors, disability and hospital insurance. The first three of these are funded by the Social Security system, while hospital insurance is funded by a Medicare tax. Both employees and employers are required to contribute to FICA taxes through regular payroll deductions. The good news is that there is a limit to the amount of FICA taxes an employee is required to pay.
FICA Tax Rates
Generally, FICA taxes are collected at a rate of 7.65% on gross earnings - earnings before any deductions. The breakdown of FICA is 6.2% for Social Security (Old-Age, Survivors, and Disability Insurance or OASDI) and 1.45% for Medicare. The following table shows the FICA limits for 2005, 2006, 2007, and 2008:
2005 FICA Tax and Social Security Limits
- FICA Tax Rate = 7.65%
- Social Security Earnings Limit = $90,000
- Maximum Social Security Contribution = $5,580.00
2006 FICA Tax and Social Security Limits
- FICA Tax Rate = 7.65%
- Social Security Earnings Limit = $94,200
- Maximum Social Security Contribution = $5,840.40
2007 FICA Tax and Social Security Limits
- FICA Tax Rate = 7.65%
- Social Security Limit = $97,500
- Maximum Social Security Contribution = $6,045.00
2008 FICA Tax and Social Security Limits
- FICA Tax Rate = 7.65%
- Social Security Limit = $102,000
- Maximum Social Security Contribution = $6,324.00
Overpayment of Social Security Taxes
If you work more than one job in any tax year and your earnings are in excess of $97,500 in 2007 or $102,000 in 2008, then you may have paid too much Social Security tax. This is because when you have more than one job in a year, each of your employers is required to withhold Social Security taxes on your wages. In this situation, you may then end up exceeding the maximum Social Security contribution limit. You can claim a refund on form 1040 when you file your personal income tax return with the Internal Revenue Service.
Medicare Taxes
As mentioned earlier, there is a 1.45% FICA tax that helps to fund the Medicare system. Employers are also required to make this payment, bringing the total funding to 2.9% of all wages earned.
Unlike payments made to Social Security, there are not maximum contribution limits or caps when it comes to Medicare. All wages earned in a given year are taxed the 1.45% rate.
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