Social Security and Medicare Tax Rates and Benefit Amounts
Author: Alice Gilman
Employers and employees each contribute into the Social Security retirement system via Social Security and Medicare (FICA) taxes. The Social Security Administration (SSA) makes annual adjustments to certain figures to protect retirees who receive Social Security benefits from the negative effects of inflation.
Social Security tax is withheld from employees' wages up to an annual maximum amount - the Social Security taxable wage base (TWB) - and employers match the amount paid by employees in equal shares. Because this is one of the figures the SSA inflation-adjusts annually, employers that withhold Social Security tax from employees' pay should anticipate a new wage base each year. The SSA usually announces the TWB by the end of October. Wages earned by employees that exceed the TWB are not subject to withholding for the Social Security portion of FICA tax.
The Medicare portion of FICA tax has no TWB. All wages earned by employees are subject to Medicare tax and matched in equal shares by employers. An additional amount of Medicare tax must be withheld from the wages of certain high earners, but employers do not match this additional amount.
To be eligible for Social Security benefits upon retirement, an employee must earn a certain amount each calendar quarter over a period of at least 10 years. This baseline amount is referred to as the quarter-of-coverage requirement. The SSA annually adjusts this amount for inflation, as well as the monthly amount of Social Security benefits retirees actually receive.
Retired employees who begin to draw Social Security benefits and then return to work may have their benefits reduced depending on their age at retirement. Full retirement age - the age at which retirees can draw full monthly benefits - depends on a retiree's birth year. The amounts retirees can earn before seeing a reduction in benefits - the retirement earnings test amounts, are also inflation-adjusted annually.
Employees who retire at full retirement age and then return to work lose $1 in benefits for every $3 they earn. This benefit reduction applies only to amounts earned in months occurring before they reach full retirement age.
Employees who retire when they are not yet at full retirement age and then return to work permanently lose $1 in benefits for every $2 they earn.
The following chart provides a two-year comparison of the Social Security TWB, FICA tax rates, and Social Security retirement benefit amounts.