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Social Security And Medicare Taxes |
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| Social security coverage provides retirement benefits and medical insurance (i.e. Medicare) benefits to individuals who meet certain eligibility criteria in the U.S. Have you ever imagined how the government finances this large sum of money spent on social security each year? As their names imply, Social Security Tax and Medicare Tax are imposed on people to cover it.
So if you work as an employee in the United States, you must pay Social Security and Medicare taxes and your payments of these taxes contribute to your coverage under the U.S. Social Security System. In general, U.S. Social Security and Medicare taxes apply to payments of wages for services performed as an employee in the United States, regardless of the citizenship or residence of either the employee or the employer. Apart from that in limited situations, these taxes apply to wages for services performed outside the United States.
As a result Social Security Tax & Medicare Tax are required to be withheld and/or to be paid by employers on behalf of their employees. In simple terms, if you are an employee, your employer may withhold State and Federal Income Taxes as well as Social Security and Medicare taxes from your wages even if you do not expect to qualify for Social Security or Medicare benefits. Further they are also required to pay a matching amount of Social Security and Medicare taxes for their employees and to pay State and Federal Unemployment tax. So if you are unaware of whether or not Social Security and Medicare taxes apply to your wages, your employer should be able to advice you.
The implication of Social Security Tax is that if you are employed by an employer, 6.2% of your wages is withheld and your employer deposits the withholding, along with its 6.2% matching contribution, to the government’s social security program. In addition, 1.45% of your wages is withheld and the employer makes a matching 1.45% contribution to the Medicare program, making the total withholdings at 7.65% of your wages.
However you should also know that all wages are not subject to Social Security Tax. In 2008, the employee tax and matching contribution for Social Security stop after the first $102,000 of wages. But on the other hand the Medicare tax has no such ceiling and thereby will be applicable to all wages.
For individuals who are self-employed a separate tax has been introduced called Self-Employment Tax which includes Social Security and Medicare Taxes. As a result if you are self-employed, you are required to pay 15.3% of your taxable income into the Social Security and Medicare programs, up to the first $102,000 of income. Further you continue to pay 2.9% of your taxable income into the Medicare program for your earnings above $102,000 just as in the previous case. Although the impact on you is greater, because you pay twice the rate of employees, you can deduct half of your federal self-employment taxes from your income when it comes time to pay your federal income tax.
The non-resident aliens enjoy some degree of leniency as they are not subject to self-employment tax. On the other hand resident aliens must pay self-employment tax under the same rules that apply to U.S. citizens. However, a resident alien employed by an international organization, a foreign government, or a wholly-owned instrumentality of a foreign government is not subject to the self-employment tax on income earned in the United States and outside the United States. |
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