FICA Tax Rates 2011 – How They Work and Why They Matter

by Darwin on February 2, 2011

FICA Tax – What is it and why’s it matter?

Anyone that has inspected their paychecks for the myriad taxes and deductions from their paychecks has surely noticed the FICA Tax line on there. The Federal Insurance Contributions Act (FICA) tax is a federal tax on both employees and employers to fund Social Security and Medicare.  It’s an even split of 7.65% of the employee’s salary – but only up to a certain cap for the Social Security piece.  The limit of only applies to the 6.2% FICA and not to the complete 7.65%. The medicare portion has no upper limit or cap.  That’s why it’s important to know what the cap is, especially if you’re on the fringe in a given year.

Based on the table below, an employee making $106,800 or less in any given year can expect to pay the full 7.65% on every paycheck of the year.  However, let’s say you make $126,800 in a particular year.  You’ll actually see an artificial “raise” of several hundred dollars in your last couple paychecks.  In this case, the additional $20,000 over the limit * .062 = $1240 additional cash in hand you’ll see in the final couple paychecks in aggregate.

Special 2011 FICA Tax Rate due to Payroll Tax Break

As part of the deal Obama forged to extend unemployment benefits at the end of 2010, not only did tax rates stay the same across the board, but he also enacted what amounts to a substantial stimulus package by way of reducing the FICA rate by 2% to 4.2% for employees.  In effect, this is a 2% bonus to all workers up to the cap of $106,800.

Another noteworthy item for the 2011 FICA Tax Cap is that again, for the third year, the cap remains the same, at $106,800.  Even though commodity prices are skyrocketing, healthcare costs are rising, and virtually everything else we routinely buy now costs more than it did a year ago, the inflation index the government uses didn’t warrant an increase.  So, at least in that regard, Americans got a bit of a break – if it matters (only to 6 figure earners really, since below the threshold you pay the full 4.2% this year regardless).

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FICA Limit Implications and Tactics

Let’s say you have variable income or you have a significant bonus that you have some control over (you could request to take it this year or next, or if you’re self-employed, you’re able to legally manipulate when you realize earnings).  If you’re at $90,000 for instance this year and have a $15,000 bonus coming to you, you’re going to pay the full 7.65% on the full amount no matter what since even $105,000 is under the FICA limit.  In your case, you may be expecting a raise and more bonuses next year to catapult you way over the limit, so it would be optimal to maximize earnings in 2010 and just realize the benefit next year with every dollar you can push into next year.

Conversely, let’s say you don’t expect a raise next year and you’re already at $106,800 – you may want to pull in earnings into this year to be able to realize the additional cash benefit in 2011.  When considering factors like this, don’t lose sight of the forest through the trees – there’s opportunity cost, your cost of cash/inflation, legal/company policy issues and other factors that should be considered holistically.  But for some, there may be some utility in trying to manipulate the timing of income to realize this 6.2% benefit.  If you’re self-employed, it’s a double benefit of 12.4%.

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2011 FICA Tax Limit – $106,800

Prior Years:

2005 – $90,000

2006 – $94,200

2007 – $97,500

2008 – $102,000

2009  -$106,800

2010  – $106,800


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FICA Tax in future years 2011 and Beyond

Unfortunately for government coffers, the FICA increases are tied to inflation indices which tend to underestimate the real inflation Americans are seeing.  Not only did we not see a FICA cap increase, but this year, Social Security recipients did not see a cost of living adjustment (COLA) either.  So, in the end, I guess it balances out somewhat from a tax revenue standpoint net-net.  But the Social Security fund is due to be depleted in 2037 and striking the 2011 2% reduction didn’t help matters.  In future years, it wouldn’t surprise me if Congress enacted a new cap to make up the difference.  If they increased it to say, $140,000 overnight, the vast majority of Americans would probably applaud it, while this would go a good way in bridging the Social Security fund depletion.  After all, that’s a lot more politically savvy than increasing the retirement age or decreasing benefits to seniors, right?  So, enjoy the bonus while you can – if you’re getting it in 2011.

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{ 26 comments… read them below or add one }

1 SK December 6, 2009 at 5:08 am

It was a nice read. I just wanted to point out that the breakdown of 7.65 percent is as follows
6.2 % FICA
1,45 % Medicare

The limit of 106,200 only applies to the 6.2% FICA and not to the complete 7.65%. The medicare portion has no upper limit or cap.

Regards,
SK

[Reply]

2 Darwin December 6, 2009 at 10:32 am

Ah yes, thanks for that clarification; I’ve updated article to reflect.

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3 Financial Samurai December 27, 2009 at 8:48 pm

Nice overview Darwin. It’s sad that the gov’t RAISED the income to $106,800, despite the spectacular HAMMERING of income over the past 2 years.

Let’s keep the income limit at $50,000!

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4 Jim April 25, 2010 at 12:23 pm

Is income other than salaries and wages such as interest or realized gain on stock purchases subect to FICA?

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Robert Reply:

@Jim, Only income earned from wages or self employment go toward the $106,800 limit. Other types of income from investments and such do not count.

[Reply]

5 Steve Eldridge May 13, 2010 at 8:24 am

I find your use of Darwin’s illustration amusing – so did Finance evolve from English, Geography or some other discipline or was it always Finance – but just a changing discipline within Finance?

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6 Bob July 14, 2010 at 5:22 pm

I’m sorry to be so critical, but your grammar is so bad that it detracts from the content. Have someone go over your article and look for incorrect pronouns and subject/predicate agreement in particular. Your readers will be happier.

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7 Darwin July 14, 2010 at 9:48 pm

Bob,
Would love to see your examples for these egregious errors…and your blog – oh! you don’t have one.

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8 Rich A. July 19, 2010 at 1:01 pm

Is this a “closed” group that limits its “membership” to the 15% with annual incomes of over $106,800?

The other 85% of us (especially the 55% with incomes of $50,000 or lower) are finding it hard to shed any tears over raising the cap on FICA. You’ll be hard-pressed to find even one high income person living with unmet needs. The hysteria about “soaking the rich” or “redistributing the wealth” might be good sound bites for rich politicians like John Boehner to utter, but let’s be real. The disparity of wealth and income is greater today than at any time since the great depression. The comfortable class and the luxurious class have all that they need. A moral nation must see to it that the plights of the downtrodden and disposed are addressed. If that means a few rich folks will have to pay a few more bucks each year, so be it. The wealthiest 400 families in the US have a total net worth of $1.57 trillion! If they paid 10%, 25%, or 50% of that amount in taxes they’d still be filthy rich.

[Reply]

John Reply:

@Rich A., Bullshit! Many people with earned incomes over $50,000 work long hours and/or two or more jobs. They deserve to keep what they earn, even more than the loafers making less than $50,000. Considering most of those who make less than $50,000 either work less than full time, are high school dropouts, I find it hard to shed a tear for them.

I put myself through college (no govt loan), take enormous financial risk to be self-employed, pay twince the FICA taxes that those with employers pay, not covered by unemployment thought I must pay unemployment taxes and my business is as likely to suffer during down times as any other, the fact that I will likely received very little more in social security benefits than those who make less than $50,000 despite paying in the maximum for decades, and the crowning fact that the government waste so much of my hard-earned tax dollars paying benefits to people who never lifted a finger during their entire lifes, I consider the FICA tax burden on incomes over $50,000 to be obscene.

[Reply]

John Reply:

@John, ‘twice’, ‘receive’, ‘lives’ – I’m not a good typist and don’t necessarily want to be.

[Reply]

James Reply:

@John, You’re wrong, to be fair, there should not be a limit. If people making less pay tax on 100% of their income, why should you pay less percentage wise. But, I also think we should have a flat tax. Maybe double it for those CEO’s of public companies making > 10 mil unless the employees’ pay has increased inline with CEO’s for the past 30 years.

[Reply]

Chase Reply:

@Rich A., Does “from each according to his ablity, to each according to his need” sum up what you are saying, Rich A.?

[Reply]

9 Joelle July 30, 2010 at 5:58 pm

Rich A ~ I get what you’re saying and I don’t expect any tears from you but my husband makes around $160,000 a year and I would not call us weathly. A LOT depends on the area in which you live. We’re in NJ and our property taxes – already the highest – have increased 10% this year. While we are not living ‘paycheck to paycheck’ and I’m blessed to be able to stay home, we certainly have to budget and we live by the “need not want” rule when purchasing things.

I think you may be talking about super wealthy people, making millions, but I felt the need to respond to you.

[Reply]

10 WorkingMan September 5, 2010 at 9:09 pm

Rich A., I have a few questions for you.
1- Why do you resent people that work harder than you?
2- If an entrepreneur puts his/her money on the line and works hard to create something, employ others, and be successful, why do you resent them?
Do they not deserve the wealth that they have created comrad?
3- Maybe YOU should spend more time trying to create a new business and less time whining about those that are, It’s unamerican.

[Reply]

mike Reply:

@WorkingMan,

No one resents people working hard. In fact, I concur up to a point with your point. However, How in the hell, sorry for cursing, can someone create new business’s these days, when money is as tight as ever. How risky is it too create a business right now? How many factors are against us? Not trying to play the sympathy card, but the only unamerican thing to do is think that everyone is the same. Thats like me telling you to shoot the ball like “Jordan” or to throw a ball like “Montana” Think before you speak bud, gain some perspective, then your mind will know more things

[Reply]

11 Jeff Kosola September 13, 2010 at 4:56 pm

I just love when I Google a term and a Yakezie friend’s blog pops up. Thanks for the great info. I was looking for the FICA limit for this year 2010. I’ll be getting an “artificial raise” soon that will be great for my debt blasting efforts. Thanks again for the great write up.

[Reply]

Darwin Reply:

@Jeff Kosola, Glad you enjoyed! Thanks for stopping in!

[Reply]

12 Joan October 14, 2010 at 9:56 pm

What happens if I am already at 88,000 in Oct, and then I take a stock option payout of 25,000 that puts me over the fica limit? I know future paychecks will not have the deduction, but with the stock option i would be paying on more that the limit (as it initially comes from another company before being included in my pay statement). Can the company reimburse me for the overage or am I just out of luck?

[Reply]

Robert Reply:

@Joan, You only have to pay up to $106,800. You will overpay but can claim a credit for the overpayment on your Form 1040, Line 69. Your accountant knows how to do this. If not, time to get a new one! ;-)

[Reply]

13 Matt October 22, 2010 at 8:37 am

another question: is the $106,800 based on total Gross Income or on Federal Taxable Wages? I’m presuming the latter but just wanted to make sure :)

Thanks!

[Reply]

Robert Reply:

@Matt, You’re correct, on the Federal Taxable Wages, not the total gross.

[Reply]

14 RD Gator November 10, 2010 at 3:06 pm

WorkingMan – Maybe what RichA is saying is that EVERYONE should have to pay the full amount of FICA tax on ALL their earned income. What’s not fair about that?

[Reply]

John Reply:

@RD Gator, What is not fair is that they will not get a higher Social Security benefit regardless of how much they pay in.

To reverse the ‘spin’ you put on your simplistic (and simple-minded) question, What is fair about a person who dropped out of high school, likely went on unemployment for many months if not years because of their lack of education and initiative, never invested in their retirement, likely worked less than 30 years in their entire lives, yet getting the same retirement benefit as some one who stayed in school, worked in a non-union job where they actually had to perform or get fired, didn’t get 24 paid holidays and 4 weeks vacation every year, had to work 40 years (instead of 30 or less like most union members) while paying in the maximum in social security taxes for 3 to 4 decades? What is fair about that?

[Reply]

15 Dick November 18, 2010 at 2:00 pm

I think this is something I should already know but do not…When I retire and start collecting social security payments. Are the social security check payments taxable at 7.65% as income for FICA (OASDI and Medicare) purposes?

[Reply]

Robert Reply:

@Dick, No. You will receive a 1099-SSA for the income which may be partially taxable (up to 85%) depending on the amount of your OTHER income (like interest and dividends). Your accountant can analyze your return to determine whether any tax is owed on the SSA payments you receive.

[Reply]

Lola Reply:

@Robert,
I being of the middle class find this tax totally unfair. I have a business that I could not afford to hire anyone this year. My regular taxes taken from my paycheck was 9100.00 then they hit me with this tax, of 8674 more . I can not run and operate a business on this kind of tax. I can’t pay more while the wealthy are not and jobs and factories are out of the country. This is not fair……I am barely hanging on and barely paying my bills and having to really watch the pennies so to speak….hard ot get used to having to sacrifice like this. This is not America———-

[Reply]

Robert Mackle Reply:

@Lola, Don’t know what to say. Perhaps France or Germany might be more to your liking? Everyone wants to complain about America, but no one wants to leave America!

16 30 percent slave January 9, 2011 at 8:49 pm

RD Gator – One tax slightly favors the ‘rich’ and all of a sudden we are up in arms about fairness. If RichA is saying maybe everyone should pay FICA on all their income, then perhaps everyone should pay 35% on their income.

[Reply]

17 etan February 14, 2011 at 7:15 pm

you’ll remember the corporate tax rate was 90ish% after WW11 because america dominated all industries…now that the obscenely rich have not felt a decline in their incomes or job opportunities like the middle class, beverly hills and Celebration, Fl, are not hurting or starving or loosing their homes. The opulent have rigged the system in their favor and now the middle class is feeling the harsh weight of their elected official’s and officially appointed official’s decree’s and and agreements, their votes cast and paid for by the very opulent system riggers a tax like this would not punish for their success, but be a fair value for the security of the continued greatness of this country. social security isn’t going anywhere and it must be garunteed by the men and women who benefit most early on from the people who will need it later.

[Reply]

John Reply:

@etan, Unforttunately (for you) you are wrong. Corporate tax rates were NEVER ’90ish %’. The top personal individual income tax rate was 90% into and after WWII, right up until JFK was elected. JFK asked Congress to lower the top marginal individual tax rate to 70% and the top marginal tax rate on earned income (wages & self-employment) to 50%. That was JKF…the crown prince of the Democrat/Socialist/Liberal Party.

Seems to me that if the personification of Christ for all Democrats (JFK) thought lower individual income taxes were good for the nation and the economy then it should be good enough for all you Johnny-come-lately under-achievers.

[Reply]

John Reply:

@etan, The highest top marginal corporate tax rate was 52% from 1952 – 1963 and 52.8% (48% plus the 10% LBJ ‘surtax’ to finance the Vietnam War) from 1968 – 69.

Because of their ignorance, those who clamor for higher corporate income taxes don’t recognize that such taxes are the most regressive taxes of all because EVERYBODY pays corporate taxes – they are built into every product you buy, and you pay the same tax whether you are a millionaire or a pauper.

AND, it has the added benefit of reducing disposable income for the poor which reduces demand for staples which serves to bring down prices for me.

Being in the middle class and a self-employed professional (CPA), I actually favor higher corporate taxes and lower individual taxes. That way I’ll pay less total taxes and the and the poor will pay more.

You corporation haters just keep it up…I’m loving watching you cut off your noses. Makes me laugh and laugh. Stupid people are fun to watch.

Heck, let’s abandon the income tax altogether and institute a VAT tax like Europe. That the most regressive ‘hidden’ tax of all – and EVERYBODY pays. Low income groups suffer the most – but hey they feel good ’cause they are taxing those mean ol’ corporations.

[Reply]

18 Mike I April 7, 2011 at 5:09 pm

Unfortunately, that “bonus” is being offset by the rise in gas and oil prices and food, as the government spending has gotten even more out of control than the previous administration.

[Reply]

19 شات April 15, 2011 at 3:07 pm
20 John November 16, 2011 at 5:03 pm

Not to put too fine a point on it, but Obama didn’t ‘forge’ or ‘enact’ anything – it was the Republican controlled House of Representatives that put together the meaure to which you refer – ALL revenue and spending measures MUST originate in the House of Representatives as required by the Constitution.

It is YOUR responsibility to get the facts correct in YOUR column and credit those who deserve the credit, not make up some bed-time story aimed at diverting your readers attention from the facts that the Obama presidency has been an abject failure as ALL economist recognize – virtually all estimate it will take ten years to get unemployment down to the Bush-era levels IF their is a change in the administraiton in 2012.

Businesses have ZERO confidence in the economy because the Obama administration has cast such a anti-business pall over the economy. I am a CPA with almost 40 years experince serving the public and I know from whence I write.

Businesses are deathly afraid of the continuing threats the Obama adminstration makes to heap taxes and regulations on the business community and the administration’s constant assault through its anti-business rhetoric. Same as the old class warfare tactic. Distract the public by creating hatred and distrust between different groups, maybe they won;t notice that Obama is ruining their lives and the country.

Why should business owners make additonal investment and take the risk associated with hiring people who don’t really want to work anyway. As business owners see it, they could lose everythjing they have worked for if Obama gets his way. Business owners are standing pat waiting for a change in the administration. If that doesn’t happen in 2012, then you haven’t seen anything yet. Every single problem that has wrecked the Greek economy is in p[lace in the US, over paid non-productive government workers, over-paid low-productivity, entitlement-minded union workers, poorly educated high school graduates, liberal-dominated media spewing the socialist manifesto…the perfect storm is just over the horizon.

[Reply]

Chase Reply:

@John, WELL SAID! Wealth and class envy have almost destroyed this nation. Whole groups of citizens are blinded with hatred because of these twin evils. Weap for your country.

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21 T Holloway CPA December 20, 2011 at 2:17 pm

Congress could raise the threshhold from 108600 to 127300, make the cuts permanent and still raise the same amount of FICA contribution that they raked in without the 2% cut.

[Reply]

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