Social Security & FICA Tax Rates

Employees are required to contribute a portion of wages to fund the Social Security Benefit Program.

Social Security touches nearly every working individual in the United States. In fact, each time you receive a paycheck, Social Security taxes are listed as a deduction from your gross pay. Yet few people understand the tax structure or how your hard-earned dollars are spent. Social Security is often controversial; however, it appears the program, and its accompanying taxes, are here to stay.

History

According to the Social Security Administration, the Social Security Act was signed into law by President Franklin D. Roosevelt on August 14, 1935. The act was created in response to the lack of economic security that existed in the early 1930s. The program, which aimed to provide income to retired workers over the age of 65, began receiving funds from payroll taxes in January 1937. The Social Security Administration reminds us that the payroll taxes collected to fund the Social Security program are collected under authority of the Federal Insurance Contributions Act (FICA). Therefore, Social Security payroll taxes are often referred to as FICA.

Eligibility

According to the Centers for Medicare and Medicaid Services (CMS), to be eligible for full Social Security benefits you must have reached full retirement age, worked and paid taxes into Social Security and worked at least 10 years. If you do not fulfill all of these requirements, you may be eligible for partial benefits. In addition, per the CMS, benefits are suspended if you are confined in a jail, prison or other penal institution for more than 30 continuous days due to conviction of a crime.

Significance

Every working legal alien or citizen is entitled to receive Social Security benefits upon reaching retirement age or becoming disabled. Also, if a person dies before retirement age, his dependents are eligible for the Social Security benefits he has earned. As a result, every working legal alien or citizen is required to fund the program. Employers are required to withhold and pay Social Security payroll taxes on employees' behalf. To help track your benefits, the Social Security Administration provides a statement on an annual basis to workers 25 or older.

Facts

According to the Internal Revenue Service (IRS), FICA taxes are comprised of two separate taxes, Social Security and Medicare. The Social Security tax is referred to as Old Age Survivors and Disability Insurance (OASDI). The second portion of the tax, Medicare, funds hospital insurance benefits. In May 2010, the tax rate for OASDI was 6.2 percent while the tax rate for Medicare was 1.45 percent. As a result, in May 2010 the average employee contributed 7.65 percent of his gross pay to fund the Social Security Benefit Program. In addition to the worker's portion of the tax, an employer pays a matching amount. A self-employed individual is responsible for the employee's and employer's portions of the tax.

Considerations

The OASDI rate applies to earnings up to a certain limit. According to the Social Security Administration, the limit generally increases each year with increases in the national average wage index. Per the "U.S. Master Tax Guide," the Medicare rate applies to all earnings; no limit is set on the amount of earnings subject to the Medicare portion of the tax.

References

• Social Security Act
• Centers for Medicare and Medicaid Services
• Internal Revenue Service
• National Average Wage Index
• "2009 U.S. Master Tax Guide"; CCH Editorial Staff Publication; 2008

Resources

• Social Secuirty Administration