Social Security and Medicare Tax: Everything You Need to Know

Social Security and Medicare tax are necessary expenses that help you prepare for retirement.

Tax Rate

According to the IRS, the tax rate for Social Security is 6.2 percent and is the same as the 2017 Social Security tax rate. The maximum annual contribution to Social Security is $15,921.60 on a maximum base wage of $128,400. The tax rate for Medicare has also remained unchanged from 2017 and is currently 1.45 percent. These are the percentages owed by both the employee and the employer.

Social Security Tax Limit

While Social Security is only taxed up to $128,400 in wages, Medicare is taxed on all wages earned and has no maximum contribution. When an employee reaches $128,400 in wages, he or she is not taxed on their earnings above this amount.

Changing Employers

If an employee has only one job in a given year, they are taxed only up to the base limit. If an employee has more than one job or changes jobs, any taxes paid to Social Security are not considered by the new employer. This means that an employee begins from scratch when paying into Social Security for that year. An employer is expected to match funds up to $7,960.80. Taxable wages run concurrent and are collected dollar for dollar. If an employee pays more than the maximum amount, however, they can claim a refund for the difference of the amount paid less the maximum.

Medicare Tax Limit

Medicare does not have a tax limit like Social Security. In fact, employers are required by law to withhold an additional 0.9 percent in Medicare tax once your taxable wages have gone over $200,000 in a single year. This is in addition to the Medicare tax rate of 1.45 percent that an employee already pays. This is different, though, from the threshold that actually triggers the Additional Medicare tax. That rate is actually $250,000 for married partners who have filed jointly or $125,000 if married partners are filing separately. For single taxpayers and for all others, the amount is $200,000.

Self Employed

Individuals who are self-employed are also required to pay Social Security and Medicare taxes. These rates vary from year to year, and there have been some changes, such as the 2012 Tax Relief Act, that have worked to lower tax rates for those who are self-employed.

This is because self-employed individuals are required to pay the personal portion as well as employer portion of Social Security and Medicare taxes. The rates have been lowered by 2 percent in recent years to help alleviate some of that burden. The wage base for Social Security in 2018 for self-employed individuals is still $128,400 though. No further taxes need be paid over that amount in a given year.

You do have the ability to deduct the employer-equivalent portion of Social Security and Medicare in determining your adjusted gross income. That deduction only applies to your income tax. It will not change your self-employed net-earnings or taxes.

Benefits Payments

The maximum benefits a retired working can get from Social Security is $2,788 every month. That number is an increase over the $2,687 per month that was available in 2017. The Social Security Administration has estimated that benefits for Social Security have averaged $1,404 in 2018. That's a $49 per month increase from the previous year.

Benefits for over 65 million people on Social Security will increase 2 percent in 2018. This decision is based on the Department of Labor's Bureau of Labor Statistics which ties COLA, the annual Cost Of Living Adjustment, to the increased Consumer Price Index. While the benefit increase in 2017 was negligible, it did rise by 1.7 percent two years before, in 2015. So, the 2 percent increase for 2018 is a welcome change.

The full retirement age for receiving Social Security Benefits is 66 years of age. The soonest a person can start receiving Social Security retirement benefits is 62 years of age. If a person chooses to begin taking Social Security benefits at age 62, they are only entitled to 75 percent of the total monthly benefit. The recipient will, however, receive the benefits two years early and benefit from 48 months of additional benefits.

The eligibility age for Medicare is also 65 years in most cases; however, some people can qualify for the program earlier. Those who have been eligible for Social Security disability benefits for 24 months or more, or those individuals who have end-stage renal disease, can qualify earlier.

President Roosevelt signed the Social Security Act into law on August 14, 1935. It was designed as a social insurance program to ensure workers a continued income after the age of 65. Social Security and Medicare are insurance programs guaranteed to protect those who are no longer employed due to old age, economic conditions, or disability.

Wage earners pay into these programs to reap the benefits later in life or if an event causes them to be unable to earn an income. The benefits are safety nets designed to help older persons and the less fortunate. Many changes have occurred to the law over the years, but it has been a major benefit to millions of Americans who otherwise would be forced to work until the end of their life.

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