"Our society must make it right and possible for old people not to fear the young or be deserted by them, for the test of a civilization is the way that it cares for its helpless members." Pearl S. Buck
Everyone who works for a living knows about the Social Security tax. It's a big deduction from your paycheck, or a big addition to your income tax if you are self-employed.
The Federal Insurance Contributions Act (FICA) structure has two parts: (1) the Old Age, Survivor and Disability Insurance (OASDI) assessment of 6.2 percent, plus (2) the Hospitalization Insurance (HI) assessment of 1.45 percent. These add up to the 7.65 percent that is paid by the worker; the employer pays 7.65 percent, for a total tax of 15.3 percent. If you are self-employed, you pay the whole 15.3 percent. Note that self-employed individuals get to deduct half their self-employment tax above-the-line before arriving at their adjusted gross income.
What does the 7.65 percent, or 15.3 percent, apply to? Higher earners know that at some point OASDI contributions stop being collected for the rest of the year. When an individual's total earnings for the year reach the "contribution and benefit base" as the Social Security Code calls it, or the "taxable wage base" as the Internal Revenue Code calls it, the individual no longer has to pay the OASDI assessment. When earnings for the year exceed the base, it's like getting a 6.2 percent raise for the rest of the year. The base amount goes up every year according to projected wage base data.
The HI assessment is paid on all wages without any upper limit. The OASDI assessment is paid from dollar one up to the taxable wage base, which this year is $118,500. When your earnings exceed $118,500, you and your employer pay no more OASDI contributions.
There's also the Medicare Tax of 0.9 percent (on the wage earner). This went into effect due to the Affordable Care Act (Obamacare). It starts being collected when a person's earnings for the year reach $200,000. Thresholds vary by filing status, but that is the point at which employers must start collecting it regardless of filing status. This means the HI assessment goes from 2.9 percent for self-employed individuals to 3.8 percent after earnings of $200,000 are exceeded.
Tune in next week to the conclusion. Have a good week!