Every year, you have to pay income taxes, sales taxes, and a lot of other business taxes. It’s complex to understand the taxation system and how individuals are taxed by IRS. However, the complexity doesn’t undermine the need to understand taxes and how the taxes are applied.
When we talk about businesses, payroll taxes are very important and hectic to calculate as well. Every employee has a deduction of payroll taxes from his/her paycheck.
FICA, withholding tax, etc., are some of the taxes why employers deduct the amount from a paycheck and directly pay to the responsible tax authority.
Many individuals find it hard to understand how taxes are calculated and deducted from their paycheck. Social security and Medicare IRS tax is one of the most prominent payroll taxes.
Many people ask what wages are subject to social security and medicare IRS tax. The queries about the exempt wages are also legitimate.
In this article, we are going to talk about the wages that are subject to social security and medicare IRS Tax. Besides, we will also talk about different exemptions as explained by IRS. So let’s get into it without a further ado.
What Is Social Security Tax?
Social security tax or old-age, survivors, and disability insurance program(OASDI) tax is levied on employees and employers to fund the U.S Social Security Program.
The social security tax is deducted from the employee’s paycheck and contributed by the employer under the mandatory requirement of the Federal Insurance Contribution Act(FICA) or self-employment tax under SECA(Self-Employed Contributions Act).
The social security tax paid by American citizens is used to fund the retirement, disability, and survivorship benefits that millions of Americans receive each year under the Social Security Administration.
The social security tax is calculated for every tax year, and the tax rate for the year 2021 was 12.4% to be funded by employers and employees in equal proportion.
The maximum wage base for the tax rate is $142,800 for 2021. The maximum wage base has been increased to $147,000 for the year 2022.
What Is Medicare Tax?
Medicare tax is also levied on employees and employers to fund the Medicare insurance program. Medicare tax is also commonly known as hospital insurance tax.
The medicare tax or hospital insurance tax is deducted from the employee’s paycheck and contributed by the employer under the mandatory requirement of the Federal Insurance Contribution Act(FICA) or self-employment tax under SECA(Self-Employed Contributions Act).
Part A of the medicare program is funded by the Medicare tax that includes hospital insurance for individuals age 65 or older or people with disabilities or medical conditions. The hospital visits, nursing home care, hospice, and other healthcare facilities are covered under Medicare hospital insurance.
The Medicare tax rate for the year 2021 was 2.9% for self-employed individuals and employees at different organizations. The tax is funded by the employer and employee for the employees in equal proportion.
What Is FICA and Who Pays The Tax?
Social Security Tax and Medicare Tax, combined, are known as FICA. The total rate of FICA is 15.3%, distributed as social security tax and medicare tax. If we talk about the portion paid by the employee, it comprises 6.2% Social Security Tax and 1.45% Medicare tax on earnings.
The maximum wage cap is the same as mentioned above, which is $147,000 for 2022. An additional Medicare tax of 0.9% may apply to individuals having earnings above $200,000 for single filers and $250,000 for joint filers.
There is a common question if FICA and payroll tax are the same. The employer deducts the tax directly from the employee’s paycheck and remits it to the tax authorities. Therefore, FICA is treated as payroll taxes.
As mentioned earlier, FICA is Federal Insurance Contribution Act, and the limits for the tax can be summarized below:
|Employee Contribution||Employer Contribution|
|Social Security Tax||6.2% only for first $147,000 as of 2022||6.2% only for first $147,000 as of 2022|
|Additional Medicare Tax||0.9% on earnings above $200,000 for single filers and $250,000 for joint filers.|
Wages Subject To Social Security and Medicare IRS Tax
The most important concern of most individuals is what wages are subject to social security and medicare IRS tax. Here are the details of all the benefits and wages that are subject to taxation.
Salary and Wages
Under the section 3401(a) of Federal Income Tax, salary and wages are
“all the remuneration for services performed by an employee for his employer, with certain specific exemptions, are wages.”
According to the regulations, everything received from the employer against services provided is wages unless specified. Salaries, fees, and bonuses are also defined under term wages if they are paid as compensation against employment.
Tips and Bonuses
Tips and bonuses received in access to basic wages are also part of the taxable income for calculating FICA. Tips, either cash or non-cash, have to be reported in the income tax return by the individuals.
The commission is defined as compensation received by an employee for the services performed. The method of calculating commission is based on a percentage of sales made or a fixed amount per sale, whatever employee and employer have agreed to.
Taxable Fringe Benefits
The fringe benefits provided by the employer to the employee are taxable and have to be included in the return unless specified as exempt. According to the regulations of the IRS, any fringe benefits not mentioned in section 2 or regulations are taxable.
Salary Reductions Contribution Employees Make To 401(k)
According to the FICA, the salary reduction contribution made by employees to 401(K) or any other comparable plan is also taxable to calculate Social Security Tax and Medicare Tax. The salary reductions for employees’ contributions are exempt from tax for normal income tax returns.
Fringe Benefits Excluded From FICA
Under the section 2 of the IRS Employees Tax Guide, the following fringe benefits are excluded and exempt from taxation:
“• Accident and health benefits. • Achievement awards. • Adoption assistance. • Athletic facilities. • De minimis (minimal) benefits. • Dependent care assistance. • Educational assistance. • Employee discounts. • Employee stock options. • Employer-provided cell phones. • Group-term life insurance coverage. • HSAs. • Lodging on your business premises. • Meals. • No additional cost services. • Retirement planning services. • Transportation (commuting) benefits. • Tuition reduction. • Working condition benefits.”
You can check the detailed treatment for these benefits in the table below:
How To Calculate Social Security Tax Rate and Medicare Tax Calculated?
FICA includes the additional medicare tax alongside the Social Security and Medicare Tax. Therefore, we will discuss the method of calculating FICA.
Let’s take an example of an individual making $160,000 yearly and receiving semi-monthly paychecks of $6667 before any taxes or retirement-plan withholding.
Medicare tax is due on the entire salary, but the Social Security tax applies to only the first $147,000 of the salary. If the maximum cap is divided by the semi-monthly paycheck, the answer is 22.04, which means the maximum wage base is achieved after the 22nd paycheck.
Therefore, the FICA tax for first 22 periods will be:
(6,667 X 6.2%) + (6667 X1.45%) = $510.0255
The medicare tax is applicable on all the payrolls irrespective of the maximum wage base. Therefore, the medicare for each subsequent paycheck will be:
(6,667 X 1.45%) = $96.67
The total contribution of the employee toward the FICA will be calculated as follow:
Social Security Tax and Medicare Tax up to $147000 + Medicare Tax Above $147,000
= ($510.0255 X 22) + ($96.67 X2)
= $11,220 + $193.343
The same amount of contribution will have to be paid by the employer to the FICA tax and submit it to the tax authorities.
If a self-employed person is filing for FICA tax, he will be liable for making a contribution for both the employer and the employee. In that case, the total contribution by the self-employed individual will be ($11,413.904 X 2)
We have discussed everything that comes under the Social Security Tax and the medicare tax. Now you know what wages are subject to the tax application and which fringe benefits are exempted from inclusion when calculating the FICA.
Please let us know if the method helped you calculate your Social Security and Medicare IRS tax contribution.