Anyone who has received a paycheck knows that FICA takes a chunk out of their gross pay every payday, but many people don’t understand what FICA is (or what it stands for). FICA is the Federal Insurance Contributions Act and it imposes two taxes on employers, employees, and self-employed people. The first tax is Old Age, Survivors, and Disability Insurance (OASDI; commonly known as Social Security). The second tax is Hospital Insurance (HI; commonly known as Medicare).
How Much is the FICA Tax?
The total FICA rate for both taxes is 7.65%–6.2% for Social Security and 1.45% for Medicare.
For 2016, an employee will pay:
- 2% Social Security tax on the first $118,500 of wages (maximum tax is therefore $7,347 [6.2% of $118,500]) plus
- 45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing separately), plus
- 35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 (($250,000 for joint returns; $125,000 for married taxpayers filing separately)
The employer will match the employee’s 6.2% Social Security tax and the 1.45% Medicare tax (but not the 0.9% additional Medicare tax—this tax is just on the employee).
For 2016, a self-employed person will pay:
- 4% Social Security tax on the first $118,500 of self-employment income (maximum tax is therefore $14,694 [12.4% of $118,500]) plus
- 9% Medicare tax on the first $200,000 of self-employment income ($250,000 for joint returns; $125,000 for married taxpayers filing separately), plus
- 8% Medicare tax (regular 2.9% Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 (($250,000 for joint returns; $125,000 for married taxpayers filing separately)
There is a maximum amount of income subject to Social Security tax, but there is no maximum amount for Medicare.
Projected Increases in Social Security Tax Base
The Social Security’s Office of the Chief Actuary (OCA) is projecting that the Social Security trust fund will become insolvent in 2034, and that the Disability Insurance trust fund will become insolvent in 2023. To shore up the programs’ solvency, it is expected that the Social Security taxable base will be increased. The OCA has provided the following estimated projection of the increase in the Social Security taxable base over the next few years:
- 2016 $118,500
- 2017 $126,000
- 2018 $129,900
- 2019 $135,900
- 2020 $142,500
These are just estimates—the actual increases to the taxable base are announced in October of the preceding year and are based on then-current economic conditions.
Basically, someone with at least $126,000 in wages will owe an additional $465 in taxes in 2017 because of the taxable base increase ($126,000 less $118,500 times 6.2%). A self-employed person with equal income will owe an additional $930 in self-employment tax.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
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