There are two main federal payroll taxes that fund Social Security and Medicare. These taxes are known as Federal Insurance Contributions Act (FICA) taxes. You maybe have seen these taxes on your paystubs, but may not be sure how they are calculated or how they benefit you.
Employees and employers both pay FICA taxes. Most of the time employees have FICA taxes automatically withheld from their pay checks and employers pay them in addition to any other taxes they may owe. Below is a closer look at each individual tax, Social Security and Medicare as described by the Center on Budget and Policy Priorities.
- Social Security tax, also known as the Old Age, Survivors, and Disability Insurance (OASDI) tax. It is levied at a rate of 12.4 percent (split evenly between employees and employers) up to a maximum amount of an employee’s wages ($132,900 in calendar year 2019). This wage cap is adjusted annually to take account of increases in average wages. The revenues go toward funding Social Security, which pays benefits to retirees, persons with disabilities, and survivors of deceased workers
- Medicare tax, also known as the Medicare hospital insurance (HI) tax. It is levied at a rate of 2.9 percent of wages (split evenly between employees and employers); unlike the Social Security tax, there is no wage cap. Married filers’ earnings over $250,000 (and singles’ earnings over $200,000) are taxed at an additional 0.9 percent, for a total of 3.8 percent on this income. Revenues from the Medicare tax support the hospital insurance portion of Medicare. (There is a 3.8 percent tax on investment income for high-income taxpayers as well, but it isn’t withheld through the payroll tax or reserved for the Medicare Hospital Insurance trust fund.)
There is another payroll tax, which is the Federal Unemployment Tax Act (FUTA), which employers pay to help finance the administration of state unemployment insurance.
