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History of Payroll Taxes

Payroll taxes, also known as FICA (Federal Insurance Contributions Act) taxes, are made up of the Social Security tax and the Medicare tax. Payroll taxes are imposed on earned income, which includes wages, bonuses and tips but not investment income.

  1. Origins

    • The Social Security tax was first implemented in 1937 and taxed employee income at the rate of 1 percent.

    Features

    • The Medicare tax was implemented in 1966 to provide funding for the Medicare program.

    Limits

    • The Social Security tax and Medicare tax were originally limited to a maximum amount of income subject to the tax. However, the Medicare tax cap was repealed in 1993. As of 2010, the Social Security tax applies only to the first $106,800 of your income.

    Considerations

    • In 1951, FICA taxes were expanded to include self-employment income as well as employee income. As of 2010, self-employed persons have to pay the entire amount of the payroll tax, while employees split the cost of the payroll tax with their employer.

    Stability

    • As of 2010, the Social Security rate equals 12.4 percent and the Medicare tax rate equals 2.9 percent. The Social Security tax rate has not changed since 1990 and the Medicare tax rate has not changed since 1986.

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