Question

Which of the following is true regarding FICA taxes?

a. they are not subject to cost-of-living adjustments each year.
b. they are paid by the employee and by the employer.
c. they are 7.65 percent of all earned income with no limitations.
d. they are 7.65 percent of earned income up to $150,000.

Answer 1

The true statement about FICA taxes is that they are paid by both the employee and the employer. FICA encompasses Social Security and Medicare taxes, which together have a standard rate of 7.65% each, with Social Security taxes subject to a wage limit (e.g., $137,700 in 2020).

Step-by-step explanation:

The correct option regarding FICA taxes is that they are paid by both the employee and the employer. FICA taxes, which stand for the Federal Insurance Contributions Act, include Social Security and Medicare taxes. Social Security tax is imposed at a rate of 12.4% up to a certain wage limit, which was $137,700 in 2020. This tax is typically split evenly between employers and employees, each paying 6.2%. On the other hand, the Medicare tax rate is 2.9%, also split between the employer and employee, with each paying 1.45%, and it applies to all earned income with no upper limit.

Therefore, the combined rate for employees and employers is 7.65% each, but this rate applies federally up to the wage limit for Social Security taxes only. Above that limit, only the Medicare tax is applied.