Solve the problem using $6.2 \%$, up to $ \$128,400$ for Social Security tax and using $1.45 \%$, no wage limit, for Medicare tax.
What are the social security and Medicare withholdings (in \$) for an executive whose annual gross earnings are $ \$131,500$?
Social Security $ \$\square$
Medicare
$ \$\square$
Answer (1)
Calculate the Social Security withholding: Multiply the Social Security wage limit ($128,400) by the Social Security tax rate (6.2%): 0.062 × 128400 = 7960.8 .
Calculate the Medicare withholding: Multiply the annual gross earnings ($131,500) by the Medicare tax rate (1.45%): 0.0145 × 131500 = 1906.75 .
The Social Security withholding is $\boxed{7960.80}.
The Medicare withholding is $\boxed{1906.75}.
Explanation
Problem Setup We are given the annual gross earnings of an executive as $131,500. We need to calculate the Social Security and Medicare withholdings based on the given tax rates and wage limits.
Social Security Calculation The Social Security tax rate is 6.2% up to a wage limit of $128,400. Since the executive's earnings exceed this limit, the Social Security tax is calculated only on the wage limit. Therefore, the Social Security withholding is 6.2% of $128,400.
Calculating Social Security Tax To calculate the Social Security tax, we multiply the wage limit by the tax rate: 0.062 × 128400 = 7960.8 So, the Social Security withholding is $7960.80.
Medicare Calculation The Medicare tax rate is 1.45% with no wage limit. Therefore, the Medicare tax is calculated on the full annual gross earnings of $131,500.
Calculating Medicare Tax To calculate the Medicare tax, we multiply the annual gross earnings by the tax rate: 0.0145 × 131500 = 1906.75 So, the Medicare withholding is $1906.75.
Final Answer Therefore, the Social Security withholding is $7960.80 and the Medicare withholding is $1906.75.
Examples
Understanding payroll taxes is crucial for both employers and employees. For example, knowing how Social Security and Medicare taxes are calculated helps individuals plan their finances and understand their contributions to these important social programs. Similarly, businesses need to accurately calculate and remit these taxes to comply with legal requirements and avoid penalties. This knowledge extends to understanding income tax withholdings, retirement contributions, and other deductions, providing a comprehensive view of financial planning and compliance.
