Monday, March 13, 2006

Who Pays The FICA Tax?

How many people think the only social security tax that impacts them is that which your employer withholds from your paychecks? The current social security old age tax is 5.3% each for both employer and employee. Anyone who earns a wage will see a line item deduction identified as OASIDI. The Social Security program has two separate programs. The “OASI” stands for Old Age Survivors Insurance tax and “DI” for Disability Insurance tax. The OASI tax is 5.3% and the DI tax is 0.9%.

The FICA Tax is the combined Social Security taxes and Medicare tax. Medicare’s tax rate is 1.45% for each for both employer and employee. The fact is FICA taxes impact everyone even those who do not work and have FICA taxes with held.

Many people believe the employer’s FICA tax payments do not affect them. Is this belief true?

Company’s either make a product and/or provide a service to the consumer. The company determines the sales price based on the total cost of materials, labor, insurance, taxes, marketing, building, utilities, etc. When the consumer pays for the product or service, the company is then able to pay the FICA tax. If no one buys the marketed goods or service, the company can not pay the FICA tax. The employer is only the collector or collection point of the FICA tax, but the consumer is the one that pays it. Therefore, the 5.3% social security old age tax withheld from your wages does cost you. However, you pay the full 10.6% when you pay for goods and services.

If this were not true, we could simply increase the employers’ portion of the Social Security Old Age tax to 100% of wages and we would have no problem. However, my guess would be most our jobs and services would be shipped outside the US where it would be cheaper.

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