What Is the Cap for Salary Taxes?

The federal government assesses your salary with both income taxes and payroll taxes; however, the Internal Revenue Service (IRS) does limit the amount of your income subject to a certain type of payroll tax.

Payroll Taxes

Payroll taxes include both Social Security taxes and Medicare taxes. Social Security taxes amount to 12.4 percent. Your employer is required to withhold 6.2 percent from your paycheck, then match that percentage and pay the IRS the total of 12.4 percent. The breakdown on Medicare is 1.45 percent each, totaling 2.9 percent your employer must pay.

Cap on Payroll Taxes

For 2011, Social Security tax applied only to the first $106,800 of your earnings. The Medicare tax always applies to your entire salary.

Function

If you are self-employed, you pay the payroll taxes alone. If you are an employee, you split the taxes with your employer.

Considerations

If you have self-employment income plus income as an employee, and the total exceeds the Social Security limit, your employee income is used to meet the requirement first. For example, if you earned $80,000 from employee income and $90,000 from self-employment income, you would only have to pay Social Security taxes on the first $26,800 on your self-employment income before you reached the $106,800 cap for 2011.

Income Taxes

The IRS does not have a cap on how much of your salary is subject to income taxes. However, the highest tax bracket for 2010 was 35 percent, so no matter how high your salary goes above $373,650 ($186,825 for married filing separate returns), your tax bracket will not increase.

References

• SSA: 2011 Social Security Changes
• Tax Foundation: U.S. Federal Individual Income Tax Rates History, 1913-2011