Question

What is the combined amount (in percent) of the employee and employer Social Security tax rate? (Assume wages do not exceed $118,500 per year.)

Short answer

The social security tax is $734,700 using 6.2% as the tax rate.

Step-by-step solution

Employee and employer social security tax

The federal Social Security system provides qualified workers retirement, disability, survivorship, and medical benefits. Laws require employers to withhold Federal Insurance Contributions Act (FICA) taxes from employees’ pay to cover system costs. Employers separate FICA taxes into two groups:

(1) Retirement, disability, survivorship, and

(2) Medical.

The tax rate

Taxes for Social Security and Medicare are computed separately. The amount withheld from each employee’s pay for the Social Security tax is 6.2% of the first $118,500 an employee earns in a calendar year.

Computation of tax

$$\begin{gathered} 6.2\% of \$118,500 \\ \frac{6.2}{100}\times \$118,500 \end{gathered}$$

$\mathbf{Therefore}\mathbf{,}\mathbf{}\mathbf{the}\mathbf{}\mathbf{social}\mathbf{ }\mathbf{}\mathbf{ }\mathbf{security}\mathbf{ }\mathbf{}\mathbf{tax}\mathbf{=}\mathbf{\$}\mathbf{734}\mathbf{,}\mathbf{700}\mathbf{.}$