Unexpectedly Intriguing!
March 8, 2005

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
Table does not include withholding allowances, pre-tax contributions to flexible spending accounts, defined contribution plans, or other factors that may reduce withheld federal income taxes.

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....

About Political Calculations

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.com

Thanks in advance!

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