Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 1 Chapter 6 Payroll Section 3 Social Security, Medicare, and Other Taxes.

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Social Security, Medicare, and Other Taxes

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Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 1 Chapter 6 Payroll Section 3 Social Security, Medicare, and Other Taxes

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 2 Understand FICA The Federal Insurance Contributions Act (FICA) Passed into law in the 1930s in the middle of the Great Depression Now called Social Security Originally designed to give monthly benefits to retired workers and their survivors

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 3 Understand FICA Employee pays 6.2% of income to FICA Employee pays 1.45% to Medicare Employer pays same rate, matching dollar for dollar all employee contributions Each employee must have a Social Security card All money set aside is credited to employee’s account according to Social Security number

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 4 Understand FICA The table shows the tax rates and the maximum earnings on which Social Security and Medicare taxes are paid

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 5 Understand FICA Use the following for all examples and exercises: Social Security tax = 6.2% × earnings up to $115,000 Medicare tax = 1.45% × total earnings

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 6 Find the Maximum FICA Tax Paid by an Employee in One Year Social Security tax is paid on only the first $115,000 of gross earnings Employee earning $115,000 during first 10 months of a year pays no more Social Security tax on any additional earnings Maximum Social Security tax in one year =.062 × $115,000 = $7130

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 7 Understand Medicare Tax Medicare tax is paid on all earnings. The total earnings are multiplied by 1.45%.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 8 Find FICA Tax and Medicare Tax When finding the amounts to be withheld for Social Security tax and Medicare tax, the employer must use the current rates and the current maximum earnings amount.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 9 Example Jean Louise has earned $110, so far this year. Her gross earnings for the current pay period are $ Find her Social Security tax.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 10 Example The Social Security tax is paid only on the first $115,000 in earnings. First, subtract earnings to date from $115,000 to find the amount subject to Social Security tax during the current pay period. $115, – 110, $ Social Security tax: $4, ×.062 = $265.51

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 11

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 12 Determine the FICA Tax and the Medicare Tax Paid by a Self-Employed Person People who are self-employed pay higher Social Security and Medicare taxes No employer to match the employee contribution Self-employed person pays a rate that is double that of an employee Adjusted earnings: 92.35% are taxed

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 13 Example Find the Social Security tax and the Medicare tax paid by Eric Grifton, a self-employed computer programmer who had adjusted earnings of $63,840 this year.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 14 Example Social Security tax= $63,840 × 12.4% = $63,840 ×.124 = $ Medicare tax= $63,840 × 2.9% = $63,840 ×.029 = $1,851.36

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 15 Find State Disability Insurance Deductions Many states have a state disability insurance (SDI) program. Qualifying employees must pay a portion of their earnings to the program. If an employee is injured and unable to work, the program pays the employee during the period of disability. The tax rate and amount subject to tax vary widely by state.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 16 Find State Disability Insurance Deductions We will use an SDI deduction of 1% of gross earnings on the first $31,800 earned in a year. We assume no SDI deductions on earnings above this amount.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 17 Example Scott Lang has earned $26,720 so far this year. Find the SDI deduction if gross earnings this pay period are $3872. Use an SDI rate of 1% on the first $31,800. The SDI deduction will be taken on $5,080 of the current gross earnings. $31,800 – $26,720 $5,080 The SDI deduction is $50.80 ($5080 ×.01).