FICA Limits 2012 — Likely To Increase Next Year

2011 saw temporary tax cuts for employees; there was a 2% reduction of FICA taxes for all employees. Typically, FICA taxes are collected on 7.65% of earnings. Prior to 2011, the rate has been 7.65% since the 1990s, but with the tax break, the 2011 FICA tax rate for employees was reduced from 7.65% to 5.65%. 

The FICA tax rate was reduced temporarily for employees by 2% for the year of 2011 and the reduced rate is scheduled to end December 31, 2012.

Origins of FICA

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In 1939, the part of the Social Security Act that governed tax collection – Title VIII – was removed. The tax collection mechanism for Social Security was moved to the Internal Revenue Tax code and named FICA, or Federal Insurance Contributions Act. FICA has since been the legislation under which payroll taxes for both Social Security Benefits and Medicare are collected. It is most often referred to simply as the FICA tax.

There are four things that FICA taxes contribute to: the federal system of old age, survivors, disability and hospital insurance. Old age, survivors, and disability insurance are all part of Social Security while hospital insurance is part of Medicare. The FICA tax rate, then, has two components: one portion is for Social Security and another for Medicare.

2010 FICA Tax Rates and Social Security Limits

In 2010, as already mentioned, the FICA tax rate was a total of 7.65% of the worker’s gross income. 6.2% of this went to Social Security and 1.45% went to Medicare. The Social Security tax could be collected on up to $106,800 of income making the maximum Social Security contribution $6,621.60.

FICA Limits 2011

In 2011, the 2% tax break came from the portion of the tax that contributes to Social Security. This reduced the Social Security rate for employees only from 6.2% to 4.2%. The amount of taxable income remained at $106,800 so the maximum employee contribution was reduced from $6,621.60 to $4485.60.

FICA Limits 2012

The FICA tax rate was reduced temporarily for employees by 2% for the year of 2011 and the reduced rate is scheduled to end December 31, 2012. After that, the FICA limits for 2013 are expected to return to 7.65% of gross income, the same as they were in 2010.

Application of FICA Limits 2012

Fred is an employee at your company. His gross income is $75,000. What does the 2011 tax break and the likely return to 2010 rate mean to him? At the 5.65% rate, Fred payed $4327.50 in FICA taxes for the 2011 year. In 20123 if the rate returns to 7.65%, he will pay $5737.50. This means he will see a roughly $120 a month decrease in his take home pay.

If you have any questions about FICA Limits 2012, please contact us for more information. 

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