Social Security and Medicare taxes fall under the Federal Insurance Contributions Act. The original Social Security legislation was passed by Congress and signed into law in 1935. In 1939, the FICA portion of the law provided amendments to the original legislation that included tax provisions that appear in the Internal Revenue Service Tax Code. Tax percentages and cutoffs for employee payments to the system appeared in the original law. Since that time, Congress has changed the cut-off point and percentage rate on numerous occasions.
In recent years, the Social Security portion of FICA amounted to 12.4 percent of the employee's gross wages, with employees paying 6.2 percent and employers matching that with another 6.2 percent. In 2010, the base wage amount when Social Security taxes disappeared from an employee's withholding, and the resulting employer match liability, stands at $106,800, making the employee responsible for a maximum payment of $6,621.60. Although the maximum salary amount remains the same in 2011, the percentages change. Employers are still responsible for 6.2 percent, up to the maximum. Workers, however, are responsible for only 4.2 percent up to the $106,800 maximum, lowering the maximum Social Security withheld to $4,485.60.
The half-and-half scenario holds true for the Medicare section of FICA taxes as well. Employees pay 1.45 percent of their income to Medicare, while the employer contributes a like amount. There is no base wage limit for Medicare. Employees and employers pay the applicable percentage on the employee's total income for the year. Therefore, there is no maximum for Medicare withholding. This rate applies to both 2010 and 2011, with no tax break available in 2011.
Self-employed individuals who earn more than $400 per year must report their earnings to the IRS on Schedule SE and pay the entire percentage rate for Social Security and Medicare taxes. Tax law bundles these payments and classifies them as self-employment tax. In 2011, the rate amounts to 13.3 percent of the earner's gross, up to $106,800, a reduction of 2 percent over 2010's tax rate. The 13.3 percent rate includes 2.9 percent for Medicare. Since the Medicare portion of self-employment tax remains the same in 2011, self-employed wage earners must pay self-employment tax of 2.9 percent on all income earned.
In recent years Congress has regularly increased aspects of the FICA tax, some years increasing the Social Security cutoff earning amount, some years increasing the tax percentage and some years increasing both. Keeping abreast of current legislation helps determine the impact on an individual's take-home pay. When filing an income tax return, the self-employed taxpayer may deduct the employer-designated portion of self-employment taxes to offset his adjusted gross income. The adjustment cannot be listed on Schedule C or used as an itemized deduction.