New and Increased Payroll Taxes for Social Security and Medicare

FICA Taxes

As of January 1, 2013, the Social Security (OASDI) portion of the payroll tax increased to 6.2% of covered wages (it had temporarily been lowered to 4.2% for 2011 and 2012). This tax is levied on income only up to $113,700 (in 2013). The OASDI tax pays for Social security retirement, dependents, survivors, and disability benefits.

The Medicare hospital insurance (HI) portion of the payroll tax remains at 1.45% on all income. Employers pay Federal Insurance Contributions Act (FICA) taxes in these same amounts as employees.

New in 2013 is an additional Medicare HI tax on high-income individuals (part of the health care reform legislation). For individuals making more than $200,000, the so-called Additional Medicare Tax is an extra 0.9% tax on all earnings above that amount. In the case of married couples who file joint returns, the threshold amount is $250,000 of household income. In the case of married individuals filing separately, the amount is $125,000 each.

Only the employee pays this additional 0.9% tax; the employer does not have to make an additional 0.9% contribution, although the employer must withhold the additional 0.9% tax from the employee’s paycheck once the employee’s income goes over $200,000.

SECA Taxes

The Self-Employment Contributions Act (SECA) imposes the same taxes, called SECA or self-employment taxes, on the net income of self-employed business owners or freelancers. The rate of the Social Security portion of SECA taxes is equal to the combined employee and employer OASDI tax rates (12.4%) and applies to self-employment income up to $113,700. The Medicare portion of self-employment taxes is also equal to the employer and employee portions put together, or 2.9%, for a total self-employment tax of 15.3%. (Fortunately, self-employed people are allowed to take a deduction of half the self-employment tax.)

The new Additional Medicare Tax of 0.9% also applies to self-employment income in excess of the threshold amount. (But the self-employment tax deduction has not been changed to allow a partial deduction of this additional tax.)

Also new in 2013 is a 3.8% Medicare tax on the investment income (dividends, interest rents, royalties, and capital gains) of high-income taxpayers. This tax uses the same thresholds as the 0.9 Medicare tax discussed above.