Social
Security—The Employment Tax
The
Social Security Act, also called Federal Insurance Contributions Act (FICA), was
signed into law by President Franklin D. Roosevelt on August 14, 1935. In addition
to several provisions for general welfare, the new Act created a social insurance
program designed to provide retired workers age 65 or older a continuing income
after retirement.
The
significance of the new social insurance program was that it sought to address
the long-range problem of economic security for the aged through a contributory
system in which the workers themselves contributed to their own future retirement
benefit by making regular payments into a fund.
The
first task was the need to register employers and workers by January 1, 1937.
The Social Security Board contracted with the Post Office to distribute and collect
applications and forward them to Baltimore where Social Security Numbers (SSN) were
registered and various employment records established. More than 30 million SSN cards
were issued and numbers assigned through this early procedure. With payroll commencing
after January 1, 1937, employees and employers started paying into the "Trust
Fund." According to the Social Security Administration, more than $4.5 trillion
has been paid into the Trust Fund and more than $4.1 trillion has been paid out
in benefits.
From 1937
- 1949, employees and employers each paid in 1% of the first $3,000 of wages.
From 1949 through 1974, the annual maximum taxable wage climbed from $3,000 to
$13,200. The contribution percentage climbed from 1% to 4.95% for both employer
and employee. To put it in perspective, from 1937 to 1949, the employee and employer
each paid in $30 for the year (assuming the employee earned $3,000). By 1974, each
paid in $653.40 if the employee earned the maximum $13,200. In 1975, due to legislative
changes, the maximum earnings subject to social security started climbing at a
very fast clip.
In 1975 - $14,100; in 1980 - $25,900; in 1985 - $39,600; in 1990 - $51,300; in 1995 - $61,200; in 2000 - $76,200; in 2007 – $97,500; and in 2008 - the first $102,000 is subject to tax. For 2009 and 2010, if you earn $106,800 or more, you and your employer will each pay $6,621.60 into the fund—or $13,243.20 for the year.
A Medicare tax was imposed starting in 1966 at a rate of 0.35% from both employee and employer. Until 1990, the Medicare tax was imposed on the same wage base as social security. From 1991 - 1993, there was a different and much higher wage base on which Medicare tax was imposed. In 1993, the wage base for Medicare was repealed and is now paid on all earned income at a rate of 1.45% each. To put this into perspective, if you earn $106,800 in 2010, both you and your employer will pay $1,548.60 ($3,097.20 total), in addition to the social security tax, to the Medicare "pot."
Self-Employed
Persons
Starting
in 1951, self-employed individuals started paying these taxes. Keep in mind that
as a self-employed person you are both the employee and the employer. Initially
the tax paid by the self-employed was only 50% higher than that amount paid by
an employee (when 2% was withheld from an employee, the self employed person paid
in 3%). Starting in 1984, the same total tax was imposed on the self-employed
as the total paid by employee and employer—12.4% today (6.2% for employee and
employer) and 2.9% for Medicare (1.45% each side).
This
is the main reason we tell people going out on their own to be very
careful when determining their hourly billing rates. As a self-employed person,
you will pay 15.3% in FICA on your first $106,800 of income and at least 10% federal
and 6% state tax. You are immediately at the 31.3% tax bracket, but more likely
at 48.3% (15.3% FICA, 25% federal and 6% state). This is 50% in taxes before you
have the take home pay.
How
is the Tax Paid
Employers
are required to withhold the social security tax and Medicare from employee's
wages. They are then matched by the employer, then paid to the
federal government along with any federal withholding you have requested on your
W-4.
Certain
employers must now make their deposits through electronic deposit. The employer
will be notified by the first of the year if they must deposit electronically.
Once you meet these requirements, you will always pay electronically. Eventually,
all employers will be required to make the payments electronically rather than
by check at the bank.
Self-employed
persons calculate their self-employment tax based on their net earned
income. It is reported on Form 1040. You are required to remit the self-employment
tax with your federal income tax (generally through quarterly estimated taxes).
See the related article for more information on Estimated Taxes.
Employer
Returns
The employer
is required to file Form 941 each quarter. This return details the wages subject
to tax for the quarter, as well as the amount of social security tax, Medicare
tax and federal withholding collected each pay period. These returns are matched
with your deposits of the tax. Failure to make timely deposits of the taxes withheld is penalized severely. These funds are not the employer's funds—they are either the employee's requested withholding or "trust fund"
taxes.
At the end of
the year, the employer files W-2s with the federal government and the Social Security
Administration. This recaps by person the taxes reported on the quarterly 941
forms. If you would like further information regarding this topic or any other tax related issue, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.
