Noteworthy Points You Should Know About Medicare and Social Security Tax
Two of the most frequent tax responsibilities that employers have are Medicare and Social Security Taxes. As an employer you are required to pay these items when you pay an employee. Here is what you need to know about these topics.
The Medicare payroll tax an employer must remit is 2.9% of an employee’s gross wages. It applies only to the earned income of the employees, plus the tips you give to your workers. The employee is responsible for 1.45% of the total tax amount, which is automatically, deducted from his/her paycheck, and the employer will have to pay the other 1.45%.
High-wage earners will owe an additional 0.9% on earned income above the thresholds of $200,000 if you are single, and above $250,000 if you are married filing jointly. For example, if your employee makes $225,000 in income, 1.45% of it will go to Medicare tax on the first $200,000, then 2.35% (1.45% plus 0.9%) on the next $25,000. The employer will be required to withhold the extra 0.9% once your wages pass the $200,000 threshold for an employee, but the employer does not owe any portion of the additional .9%.
Medicare Cap Limit
As there is no ceiling on the 1.45 percent portion of the Medicare tax so employers must continue to withhold, and to pay the Medicare tax regardless of how much you pay an employee.
Social Security Taxes
The Social Security tax is the tax levied on both employers and employees used to fund the Social Security program. Social Security tax is usually collected in the form of payroll tax or self-employment tax on wages earned or net income for a self-employed person. The Social Security tax pays for the retirement and disability benefits received by millions of Americans each year. It was one of the pieces of legislation passed in the New Deal era to help the country avoid massive amounts of destitute people, and create a more stable economic base coming off of the Great Depression.
The law requires employers to pay the employee’s portion when they remit the employer’s tax obligations. For the Social Security tax, employers are required to pay 6.2%, and employees pay the other 6.2% towards the social security tax for a total amount of 12.4%. Employers remit the total amount withheld when they make their tax deposits.
Social Security Cap Limits
For 2016, employer’s obligation to withhold and to pay the Social Security tax for an employee ends once you’ve paid that employee total wages of $118,500.
Calculating Your Withholdings and Portions
To calculate the employer withholding for Medicare and Social Security taxes as an employer, you simply multiply an employee’s gross wage payment by the applicable tax rate to determine how much you must withhold and how much you must pay in Social Security and regular Medicare taxes.
As an employer, you should keep in mind that regular Medicare and Social Security taxes owed are unaffected by the number of withholding exemptions an employee may have claimed for income tax withholding purposes.
Here is a simple example of the weekly amount an employee would have withheld, and also showing the employer’s burden.
medicare 1.45% employee’s portion $14.50
social security 6.20% employee’s portion $62.00
medicare 1.45% employer’s portion $14.50
social security 6.20% employer’s portion $62.00
Employer’s cost for $1000 of wages $1,076.50
Employer pays an additional $76.50
The employer would remit a total of $153 in tax deposits for this $1000 in wages. If the employee had no other withholding or taxes owed their net pay check would be $923.50.