When it comes to payroll tax withholdings, social security has a tendency to dominate the conversation.
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That's understandable since social security represents the largest portion of FICA and the Social Security system is a hot button issue with taxpayers.
The other, neglected portion of FICA is Medicare tax. Although Medicare tax isn't as high profile as social security tax, it has a direct bearing on take-home pay for millions of American taxpayers. But to understand the implications of the Medicare tax rate in 2011, it's important for business owners to first have a solid grasp on the fundamentals of FICA and payroll tax withholdings.
FICA and Medicare
Federal Insurance Contribution Act (or FICA) tax was created to fund the U.S. Social Security and Medicare systems. Before the Great Depression, there were no federally mandated retirement savings programs. Individuals who were unwilling or unable to save for their own retirements were often left desolate at the end of their working lives. Likewise, there was no federal health insurance program for the elderly, many of which were left without healthcare during a stage of life when they needed it the most.
While social security addressed retirement savings, the creation of Medicare in 1965 provided federal health insurance for people age 65 and older. Although the employer must pay half of the tax, the Medicare portion of FICA has historically been 2.9% of the employee's gross compensation.
Employers are also responsible for administrating Medicare tax payments. Self-employed workers are expected to administrate their own FICA and Medicare tax payments, totaling 2.9% of income earned through self-employment (both the employer and employee share).
2011 Medicare Tax Rate
For the 2011 tax year, Congress has reduced the employee share of the social security from 6.2% to 4.2%. The employer portion of the social security remains at 6.2%, as does the Medicare tax of 2.9%. In other words, the Medicare tax rate for 2011 has not been reduced and is set to remain at the current level.
Also, employers should know that the Social Security Wage Base (SSWB), or income threshold is set to remain at $106,800 for 2011. Unlike previous years, this threshold will not be raised in 2011, meaning that employees must pay social security tax for income up to $106,800. However, since the SSWB does not affect the Medicare portion of FICA, employers and taxpayers are require to pay Medicare tax on the full amount of each worker's gross income.