Social Security and Medicare Tax: Everything You Need to Know
Social Security and Medicare tax are necessary expenses that help you prepare for retirement.4 min read
Social Security and Medicare Tax
Social Security and Medicare tax are necessary expenses that help you prepare for retirement.
Social Security and Medicare Tax: Tax Rate
According to the IRS, the tax rate for social security is 6.2 percent and is the same as the 2016 social security tax rate. The maximum annual contribution to social security is $15,772.80 on a maximum base wage of $127,200. The tax rate for Medicare has also remained unchanged from 2016 and is currently 1.45 percent. These are the percentages owed for both the employee and the employer.
Social Security and Medicare Tax: Social Security Tax Limit
While Social Security is only taxed up to $127,200 in wages, Medicare is tax on all wages earned and has no maximum contribution. When an employee reaches $127,200 in wages he or she is no longer taxed on their earnings.
Social Security and Medicare Tax: 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. Your employer is expected to match funds up to $7,886.40. Your taxable wages run concurrent and are collected dollar for dollar. If you pay over the maximum amount however, you can claim a refund for the difference of the amount that you paid less the maximum.
Social Security and Medicare Tax: 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 than the threshold that actually triggers the Additional Medicare tax. That rate is actually $250,000 for married partners that have filed jointly or $125,000 if married partners are filing separately. For single taxpayers and for all others the amount is $200,000.
Social Security and Medicare Tax: 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 201 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. They have been lowered in recent years, by 2 percent, to help alleviate some of that burden. The wage base for Social Security in 2017 for self-employed individuals is still $127,200 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.
Social Security and Medicare Tax: Benefits Payments
The maximum benefits a retired working can get from Social Security is $2,687 every month. That number is an increase over the $2,639 per month that was available in 2016. The Social Security Administration has estimated that benefits for Social Security have averaged $1,355 in 2017. That's only a $5 per month increase from the previous year.
Benefits for over 65 million people on Social Security will only increase 0.3 percent in 2017. 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 benefits in 2017 have been negligible they did rise by 1.7 percent two years ago in 2015.
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 percent 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. Some people can qualify for the program earlier however. 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 the program to reap the benefits later in life or should an event cause you to be unable to earn an income. They 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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