Your retirement and health coverage is included in your Social Security and Medicare taxes. Taxation for Social Security comes under the Federal Insurance Contributions Act (FICA) withholding established in the amended 1939 law. Legislators removed the contributions provisions from the Social Security Act and placed them in the Internal Revenue Code at that time. Your employer collects the taxes from you, matches that amount and pays the entire tax to the Internal Revenue Service (IRS) periodically.
FICA and Medicare taxes have remained the same for several years, but the upper limit for taxation of Social Security has increased. For example, in 2010, the limit for taxation for Social Security was $106,800 compared with $113,700 in 2013. The maximum Social Security tax collected in 2010 was $6,621.60 per contributor; that maximum in 2013 was $7,049.40, or 6.2 percent of $113,700. Although the percentage hasn't increased, the taxable amount has increased, and the high-earning worker is paying Social Security tax on a larger share of earnings.
FICA taxes and Medicare taxes are separate taxes, and your employer keeps them separate on the W-2 form you receive at the end of each year to record your income and taxes paid. Your employer takes 6.2 percent out of your paycheck for Social Security and 1.45 percent for Medicare, for a total of 7.65 percent of any income you make in 2013. Social Security's limit for 2013 is $113,700: Income in excess of $113,700 from one employer in that tax year should not have Social Security taken out of your check. Medicare taxes are 1.45 percent for any amount you make, with no ceiling or limitation. There is also an Additional Medicare Tax of .9 percent beginning in 2013 for individuals earning over $125,000 and filing taxes as married filing separately, $250,000 for those married filing jointly and $200,000 for singles.
Your employer matches your withholding amount and pays in 6.2 percent for Social Security and 1.45 percent for Medicare when it submits the taxes to the IRS. The total tax is 12.4 percent for Social Security and 2.9 percent for Medicare, half of which comes from your paycheck and half of which comes from your employer.
Self-employed persons find that they must pay the entire amount, or 15.3 percent up to $113,700, as self-employed workers pay the employer's part and the employee's part, or 12.4 percent for Social Security plus 2.9 percent for Medicare, with no limitation. Independent contractors or other contract workers pay the same percentage. The effect of working as an employee is the tax benefit of 7.65 percent in 2013.
The Bureau of Labor Statistics (BLS) reported in December 2012 that employer-paid benefits amount to 29.7 percent of the total hourly cost for employees. These figures include paid leave such as vacation and sick leave, overtime and supplemental pay, retirement and savings plans, worker's compensation, and Social Security and Medicare taxes. These figures are the true value of working as an employee, representing amounts your employer pays in addition to your hourly salary.