Every worker sees a Social Security (FICA) tax taken out of his or her paycheck.

Question

Every worker sees a Social Security (FICA) tax taken out of his or her paycheck. The nominal tax rate on workers is 7.65 percent. But there's a catch: only wages below a legislated ceiling are taxable. In 2014, the table wage ceiling was $117,000. What percentage of income is paid in Social Security taxes by a worker in 2014 earning:

Instructions: Enter your responses as a percent rounded to two decimal places.

(a) $40,000? _____%

(b) $80,000? _____%

(c) $200,000? _____% Instructions: Enter your response as a percent rounded to one decimal place.

Explanation / Answer

(a) Income = $40,000

Wage up to which Social security tax is applicable = $117,000

Tax rate = 7.65%

Since, income in this case is less than the wage upto which social security tax is applicable on whole income.

Calculate amount of social security tax -

Amount of tax = Income * Social security tax rate = $40,000 * 0.0765 = $3,060

Calculate Social security tax as percentage of income -

Tax as % of income = Social security tax/Total income = $3,060/$40,000 = 0.0765 or 7.65%.

The Social Security tax is 7.65% of worker's earning in 2014.

(b) Income = $80,000

Wage up to which Social security tax is applicable = $117,000

Tax rate = 7.65%

Since, income in this case is less than the wage upto which social security tax is applicable on whole income.

Calculate amount of social security tax -

Amount of tax = Income * Social security tax rate = $80,000 * 0.0765 = $6,120

Calculate Social security tax as percentage of income -

Tax as % of income = Social security tax/Total income = $6,120/$80,000 = 0.0765 or 7.65%.

The Social Security tax is 7.65% of worker's earning in 2014.

(c) Income = $200,000

Wage up to which Social security tax is applicable = $117,000

Tax rate = 7.65%

Since, income is greater than $117,000, only upto amount of $117,000 out of $200,000 that social security tax will be applicable.

Calculate amount of social security tax -

Amount of tax = Income * Social security tax rate = $200,000 * 0.0765 = $8,950.5

Calculate Social security tax as percentage of income -

Tax as % of income = Social security tax/Total income = $8.950.5/$200,000 = 0.0447 or 4.47%.

The Social Security tax is 4.47% of worker's earning in 2014.

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