Background

Under the Federal Insurance Contributions Act (FICA), employers, employees, and self-employed workers pay two taxes on wage and self-employment income. One is the 6.2% tax for Old Age, Survivors and Disability Insurance (OASDI, otherwise known as the “Social Security tax”), and the other is the 1.45% Medicare tax. Taken together, the two taxes add up to 7.65% of wages or self-employment income.

For wage earners, the employer pays 7.65% of wages earned, and the employee pays an equal amount. Those who are self-employed pay both the employer and employee portions, though the rules allow for certain adjustments to be made.

The Social Security Tax

The amount to which the Social Security portion of the FICA tax applies is capped at a certain specified level, or “wage base.” The wage base is adjusted annually to keep pace with overall wage increases. Under the new announcement, the Social Security tax will no longer apply once the taxpayer exceeds $117,000 in wages or self-employment income in 2014. As a result, even if the worker were to earn more than $117,000 in 2014, the amount of the obligation for the employer and the employee would be limited to $7,254 (each).

The Medicare Tax

Unlike the Social Security tax, the 1.45% Medicare tax has no taxable maximum, so the $117,000 cap will not apply to that portion of the tax.

In fact, the 1.45% Medicare tax rate increases by 0.9% when wages exceed certain levels — $250,000 for joint returns and $200,000 for unmarried filers. However, this 0.9% increase is on the employee side only. The employer is only responsible for the 1.45% employer portion of the tax.

Please contact your Dopkins tax advisor or Robert Pollock at rpollock@dopkins.com with any questions or to determine if you are affected.