Now that there is some serious discussion around the blogosphere supporting the idea of lifting the income cap upon which Social Security taxes may be paid as part of the larger reform that may occur in that arena, it might help put things in better context to see just where and how the taxes that affect your paycheck are figured.
Payroll Taxes
Payroll taxes are taken out of your paycheck as a direct percentage of your income. These taxes are not adjusted for inflation. The payroll tax for Social Security is 6.2% of your income. Your employer (or you again if you're self-employed) contributes an amount also equal to 6.2% of your income toward Social Security, but this amount is exempt from both federal and state income taxes. The total amount paid by your employer and/or you in Social Security taxes is 12.4% of your income. At present, Social Security taxes are only paid on the first $90,000 of your income, which also serves to cap the amount high-income earners may receive from the program in retirement benefits.
The payroll tax for Medicare is 1.45% of your income, or a total of 2.9% when you factor in the federal and state income tax exempt amount paid by your employer. There is no cap on earned income that may have the Medicare payroll tax assessed against it.
Federal Income Taxes
The following table illustrates the progressive income tax structure in the U.S. Given the overall complexities of the U.S. tax code, I've opted to present the following employer withholding tax tables for 2005 as a simplified proxy for the real code, which at last count, would fill over 6,000 letter-sized pages. The following annual withholding information was taken from IRS Publication 15 (available online as a 373KB PDF document.) The income threshholds are adjusted each year for inflation.
| U.S. Income Tax Withholding Rates and Brackets for 2005 | |||||
|---|---|---|---|---|---|
| Tax Rate (%) | Single | Married | |||
| Low End Threshold ($USD) | High End Threshold ($USD) | Low End Threshold ($USD) | High End Threshold ($USD) | ||
| 0 | 0 | 2,650 | 0 | 8,000 | |
| 10 | 2,650 | 9,800 | 8,000 | 22,600 | |
| 15 | 9,800 | 31,500 | 22,600 | 66,200 | |
| 25 | 31,500 | 69,750 | 66,200 | 120,750 | |
| 28 | 69,750 | 151,950 | 120,750 | 189,600 | |
| 33 | 151,950 | 328,250 | 189,600 | 333,250 | |
| 35 | 328,280 | None | 333,250 | None | |
Sample Taxes for Various Income Levels
The following table provides the federal income taxes, Social Security taxes and Medicare taxes that would be withheld from your paycheck for various annual income levels:
| Sample Annual Taxes for Various Income Levels | |||||
|---|---|---|---|---|---|
| Annual Income ($USD) | Federal Income Tax ($USD) | Social Security Taxes ($USD) | Medicare Taxes ($USD) | Total Taxes ($USD) | Percentage of Income (%) |
| 30,000 | 3,745 | 1,860 | 435 | 6,040 | 20.1 |
| 60,000 | 11,095 | 3,720 | 870 | 15,685 | 26.1 |
| 90,000 | 19,203 | 5,580 | 1,305 | 26,088 | 29.0 |
| 120,000 | 27,603 | 5,580 | 1,740 | 34,923 | 29.1 |
| 150,000 | 36,002 | 5,580 | 2,175 | 43,757 | 29.2 |
| 180,000 | 45,805 | 5,580 | 2,610 | 53,995 | 30.0 |
| 240,000 | 65,605 | 5,580 | 3,480 | 74,665 | 31.1 |
| 300,000 | 85,405 | 5,580 | 4,350 | 95,335 | 31.8 |
| 3,000,000 | 1,029,840 | 5,580 | 43,500 | 1,078,920 | 36.0 |
What if the income cap on Social Security taxes goes away?
I have put together a tool (Your 2005 Paycheck) that will let you estimate what your paycheck will look like after the payroll taxes and federal income taxes outlined above are withheld from it. When I originally developed the calculator, I never accounted for the income cap on Social Security taxes, so without any real planning on my part, I've managed to set it up so those of you with incomes over $90,000 can see what the proposed elimination of this cap would do to your paycheck. Considering that those individuals with annual paychecks over $92,663 represent the top 10% of all income tax payers, who pay in nearly 66% of all income taxes collected (at least according to 2002 data), I figure they might be interested in seeing what the additional dent to their paycheck might look like!
The upcoming version of this tool will incorporate state-by-state income tax withholding, and will also do the proper math for calculating the Social Security tax. It seems like the work never stops around here....
Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:
ironman at politicalcalculations
Thanks in advance!
Closing values for previous trading day.
This site is primarily powered by:
CSS Validation
RSS Site Feed
JavaScript
The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.
Other Cool Resources
Blog Roll
