Federal Insurance Contribution Act (FICA) tax affects employers and taxpayers.
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Although employers and employees each pay 50% of FICA, employers are responsible for administrating payroll withholdings. Self-employed workers are responsible for administrating their own FICA contributions as well as paying both the employer and employee portion of the tax.
Many taxpayers don't realize that FICA is actually a combination of two taxes: (1) Social Security tax and (2) Medicare tax. The total FICA contribution is pegged at 15.3% of gross income with 12.4% designated for social security tax and the remaining 2.9% designated for Medicare.
Congress and the IRS have held FICA tax rates steady for years. But in the final days of 2010, Congress passed a tax relief measure that will significantly impact payroll taxes and the FICA tax rate for the 2011 tax year. Here's what you need to know . . .
2011 FICA Tax Rates
In December 2010, Congress passed legislation that was designed to continue the Bush-era tax cuts that were set to expire at the end of the year. This action came at the end of a long debate about middle-class tax relief and the state of the American economy. As a consequence, many (but not all) of the tax credits and other benefits that existed in 2010 will continue in 2011.
To provide further relief for American taxpayers, Congress also passed a temporary reduction in the employee portion of FICA. For the 2011 tax year, the employee portion of social security tax has been reduced from 6.2% to 4.2%. Employers should realize that this reduction does not apply to the employer share of social security tax. But since self-employed taxpayers pay both the employer and employee share, they will also benefit from the 2011 FICA reduction.
The Social Security Wage Base (SSWB), or income threshold will remain flat in 2011 at $106,800. Any income earned above this threshold is not subject to social security taxes. In most tax years, the SSWB is adjusted upward by at least a few percentage points, but for a variety of reasons no increase has been scheduled for 2011.
Taxpayers and employers should also know that the Medicare portion of FICA is unchanged in 2011. In contrast to the 2011 social security portion, employers and employees will each be responsible for paying 1.45% of the workers' gross income in Medicare taxes.