LOS ANGELES, CA – When examining your pay stub, you may notice deductions for Federal Insurance Contributions Act (FICA) taxes, which encompass contributions to both Medicare and Social Security. These deductions represent a mandatory split between employees and employers, totaling 15.3% of gross income. The Social Security tax rate is 6.2%, while the Medicare tax rate is 1.45%. However, for self-employed individuals, the responsibility falls entirely on them to cover the entire amount, including making quarterly estimated payments.
One bright spot is the cap on Social Security tax, which does not apply to income exceeding $168,600 (2024). This means that the maximum 2024 Social Security tax amount would be approximately $10,453 for employees and $20,906 for self-employed individuals. Additionally, high-earning taxpayers may be subject to an extra 0.9% Medicare tax, with income thresholds varying by filing status and ranging from $125,000 to $250,000.
However, there are exceptions where individuals may not have to pay Medicare or Social Security taxes, such as young workers, foreign government employees, non-resident aliens, or eligible religious group members. Specific situations may require the submission of a form to qualify for exemption.
When it comes to Social Security benefits, the taxes paid do not go into a personal account but rather earn work credits based on yearly earnings. These credits determine the eligibility and amount of benefits when applying for disability or retirement benefits. The concern arises as the system relies on current contributions to cover payments for current recipients, thus leaving future contributions to fund the current contributors’ benefits.
As more people become eligible for benefits, the issue of Social Security funds running out within the next decade is a growing concern. This could lead to various changes in the future, such as increased payroll taxes, the elimination of the Social Security earnings cap, or reduced benefits. This creates an “imbalance of taxes paid versus benefits received,” as it becomes common to receive more benefits than the amount paid towards Social Security over one’s working years.