Payroll taxes for Social Security benefits are collected under the authority of the Federal Insurance Contributions Act, or FICA. This tax has its origins back in 1935, when it was introduced as part of the Social Security program.
What are FICA Taxes?
When the tax provisioning portion of the Social Security Act - Title VIII - was removed from 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 is collected 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 and there is a limit, or maximum contribution employees are required to pay each year towards Social Security.
FICA Tax Rates
Generally, FICA taxes are collected at a rate of 7.65% on gross earnings, which are earnings before any deductions are taken. The breakdown of FICA is 6.2% for Social Security (Old-Age, Survivors, and Disability Insurance or OASDI) and 1.45% for Medicare. The limits for 2014 are shown below, while the accompanying table shows the FICA limits for 2005 through 2013:
2014 FICA Tax and Social Security Limits
FICA Taxes 2005 through 2013
Note: In 2011, the FICA tax rate for employees was lowered to 5.65%. The employer tax rate remained unchanged, while the Social Security rate for employees was lowered to 4.20%. In 2012, the reduction to the Social Security withholding rate from 6.20% to 4.20% of wages that began in 2011 was extended through February 29, 2012.
Overpayment of Social Security Taxes
Individuals that work for more than one employer in any tax year, and have earnings in excess of $113,700 in 2013, or $117,000 in 2014, may have paid too much Social Security tax. When an individual works more than one job in a calendar year, each employer is required to withhold Social Security taxes on wages. When this happens, a taxpayer may end up exceeding the maximum Social Security contribution limit. Individuals can claim a refund on Form 1040 when they file their personal income tax return with the Internal Revenue Service.
As mentioned earlier, there is a 1.45% FICA tax that helps to fund the Medicare system. Employers are also required to make this contribution, bringing the total funding to 2.9% of all wages earned.
Unlike payments made to Social Security, there are no maximum contribution limits, or caps, that apply to Medicare. All wages earned in a given year are taxed at the 1.45% rate. Wages paid in excess of $200,000 for single filers and in excess of $250,000 for married filers starting in 2013 and 2014 will be subject to an extra 0.9% tax.
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