How are Payroll Taxes Calculated? – Social Security and Medicare

April 20, 2017
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State Income Taxes: Calculating Payroll - Money Matters

In my previous blogs, we discussed how to calculate federal income tax. Some other big amounts that come out of our paychecks are for Social Security and Medicare taxes. How are Social Security taxes calculated in payroll?

What wages are taxed for Social Security and Medicare?

Social Security and Medicare taxes go hand in hand. One reason for this is because the taxable wages for these two taxes are generally the same. The taxable wages for Social Security and Medicare taxes are defined below:

Gross Pay (Including tips and taxable fringe benefits)

Less: Section 125 deductions (medical, dental, vision, dependent care, pre-tax commuter benefits, etc.)

Equals: Social Security and Medicare taxable wages

If you compare the definition of these taxable wages to the definition of federal income taxable wages, you’ll notice something is missing. For Social Security and Medicare, deferred income (401k, 403b, Simple IRA’s, etc.) is considered taxable and not subtracted from gross pay. Using Bob again as our example:

Example:

Bob is paid semi-monthly. On this paycheck, he earned $8,000 in salary. Bob gets a semi-monthly auto allowance of $1,000. He has a medical deduction of $1,500, and he contributes 10% of his income to his 401k. What is Bob’s taxable income for Social Security and Medicare?

*401k does not reduce gross pay for calculating Social Security and Medicare taxes.

What are the tax rates for Social Security and Medicare?

Social Security has a tax rate of 6.2% and Medicare has a tax rate of 1.45%. In the example above, Bob’s Social Security taxes would be calculated as follows:

Bob’s medicare taxes would be calculated as:

Social Security tax limit for 2017 is $7,886.40

One of the differences between Social Security and Medicare is that Social Security is taxed only on the first $127,200 of taxable wages, or $7,886.40 in taxes. Once you hit that limit, you will no longer be taxed for Social Security in 2017.

Related blog post: How are Payroll Taxes Calculated? – Federal Income Tax Withholding

How will changing employers affect my limit?

In general, when you change employers, your prior Social Security wages will not be considered with your new employer. You will start all over again for Social Security limits. This is because employers match Social Security taxes (we’ll talk about employer taxes in a later blog post), and your new employer is expected to match up to $7,886.40 in taxes. While you may have Social Security taxes taken in excess of your limit, you can claim a refund of Social Security taxes paid over $7,886.40 in 2017 on your personal income tax return.

Additional Medicare

There are no tax limits for Medicare. You will pay taxes at a rate of 1.45% on all of your taxable wages. In addition, employers are required to withhold Additional Medicare tax of 0.9% once taxable wages are over $200,000 for the year. In our example above, if Bob’s year-to-date taxable wages were $200,000 before payment, his additional Medicare taxes would be calculated as:

Social Security and Medicare taxes are very similar and use the same wage definition. Social Security is capped at $7,886.40 for 2017. There is no Medicare cap, and employers are required to withhold an additional Medicare Tax of 0.9% for wages over $200,000. Now that we’ve covered Social Security and Medicare taxes, we’ll tackle state taxes in our next segment.

Related blog post: How are Payroll Taxes Calculated? – Federal Income Taxable Wages 

About

Matthew Keller is a Senior Payroll Specialist at Zenefits who authors our "Money Matters" column. With 20+ years of experience in payroll and accounting, Matt wants to help customers navigate frequent law changes, taxes, and more.

Category: Payroll, Money Matters With Matt


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