A:

Social Security and Medicare payroll withholding are collected as the Federal Insurance Contributions Act (FICA) tax. 12.4% of earned income up to an annual limit must be paid into Social Security, and an additional 2.9% must be paid into Medicare. If you are a waged or salaried employee, half of the payroll tax - 6.2% for Social Security and 1.45% for Medicare - is automatically withheld from each paycheck, and your employer contributes the other half. If you are self-employed, you are responsible for the entire amount (12.4% for Social Security plus 2.9% for Medicare), but you can generally deduct half of the FICA tax on your federal income tax return.

There is no income cap (or wage base limit) for the Medicare portion of the tax, meaning you continue to owe your half of the 2.9% tax on all wages earned for the year. The Social Security tax, however, has a wage base limit - the maximum wage that is subject to the tax for that year. For earnings in 2014, the wage base is $117,000. That means up to $7,254 can be withheld from your paycheck for Social Security taxes - but not more, regardless of how much you earned.

When President Roosevelt presented his plan for Social Security, it did not include an income cap. The original plan exempted high earners from Social Security altogether - including both taxes and benefits - and anyone who made more than $3,000 a year (about $52,000 in 2014 dollars) was supposed to be left out of the system completely. As FDR's plan worked its way through Congress, the exemption for high earners was eliminated, and the House Ways and Means Committee replaced it with a $3,000 cap. Historians on the subject have found no evidence supporting why the committee chose an earnings cap over an exemption, but it has been in place ever since. Since 1982, it has risen at the same rate as wages in the economy.

The cap on wages subject to the tax is the subject of controversy, in part because it means that while most workers pay the tax on every dollar of their income (because the vast majority of workers earn less than the wage base limit), the highest earners pay tax on only a part of their income. Proponents state that lifting the cap would result in a significant amount of revenue that could help cover the shortfall Social Security will soon face, while opponents claim it would result in one of the largest tax increases of all time.

RELATED FAQS
  1. How much of my income goes to Social Security taxes?

    Discover how much of your income goes to social security tax: what the rate is, what the limits are and what types of income ... Read Answer >>
  2. What are the Social Security tax caps?

    Learn how the Social Security tax cap works, what percentage of income is deducted for Social Security taxes and the history ... Read Answer >>
  3. How is Social Security tax calculated?

    Find out how Social Security tax withholding is calculated, including the impact of the Medicare tax and the maximum taxable ... Read Answer >>
Related Articles
  1. Retirement

    Understanding Your FICA Payments

    The Federal Insurance Contributions Act is a U.S. law that requires a paycheck deduction be paid to Social Security and Medicare.
  2. Retirement

    Will the Social Security Cap Increase Help It Last Longer?

    The Social Security cap increase will be 7% in 2017, but even that may not be enough to keep Social Security from running out of funds.
  3. Retirement

    When Do I Stop Paying Social Security Tax?

    Almost never, unless you belong to one of these special groups.
  4. Taxes

    Small Business Tax Obligations: Payroll Taxes

    Don't leave it up to your accountant - owners are ultimately responsible for fulfilling tax obligations.
  5. Retirement

    How Social Security Works for the Self-Employed

    As both employee and employer, you have to pay more in Social Security, but there are deductions that can help lighten the tax burden.
  6. Retirement

    Will My Social Security Benefits Be Taxed?

    If, and how much, your social security benefits are taxed depends on your income and where you live.
  7. Taxes

    Is it Smart to Avoid Paying Federal Income Tax?

    Not paying federal income taxes might sound appealing, but is it really a good idea?
  8. Retirement

    4 Things That Are Reducing Your Social Security

    Worried about Social Security dwindling? We discuss four ways it’s already happening.
  9. Financial Advisor

    These 13 States Tax Your Social Security Benefits

    It may surprise many that Social Security benefits are taxed. The best way to not let it derail your tax situation is to plan for it. Here's how.
  10. Retirement

    Can the Market Affect Social Security Benefits?

    What you should know about the relationship between the stock market and your monthly Social Security check.
RELATED TERMS
  1. Federal Insurance Contributions Act - FICA

    A U.S. law requiring a deduction from paychecks and income that ...
  2. Social Security Act

    A law enacted by President Franklin D. Roosevelt in 1935 to create ...
  3. Medicare Wages

    An employee's earnings that are subject to a U.S. payroll tax ...
  4. Social Security Tax

    The tax levied on both employers and employees used to fund the ...
  5. Taxable Wage Base

    Also known as the Social Security Wage Base, this base is the ...
  6. Social Security Benefits

    The monetary benefits received by retired workers who have paid ...
Hot Definitions
  1. Asset Turnover Ratio

    The amount of sales generated for every dollar's worth of assets in a year, calculated by dividing sales by assets.
  2. Book Value

    1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated ...
  3. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
  4. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  5. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  6. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
Trading Center