What accounts for the "average" FICA payroll tax paid not being close to its 15.3% theoretical maximum?
This is a question regarding the social insurance tax in the U.S.
The effective payroll tax cited by the Congressional Budget Office as well as the Tax Policy Center is lower than I would expect for a middle class American.
As I understand it, the tax rate is 6.2% for Social Security and 1.45% for Medicare. The employer has to match this so the total tax is 15.3%. (With self-employed workers paying the entire amount themselves.)
However if you look at the tables in the links below, you can see the effective social insurance tax never hits even 11%. Both the CBO and the TPC include the employer contribution (otherwise the number should never go above 6.2% + 1.45% = 7.65% either).
What's going on? As I understand it, the standard deduction and so forth does not apply. The payroll taxes apply directly to your gross income, not adjusted gross income, so I would think the effective tax is 15.3% for those earning less than the Social Security Wage Base (3,700 in 2013.)
www.cbo.gov/publication/43373 http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456 www.taxpolicycenter.org/taxtopics/Payroll-Taxes.cfm "Although both employees and employers pay FICA taxes, most economists believe that the employer’s share is fully offset by reduced wages and thus the entire economic burden of the tax ultimately falls on workers."
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Social Security and medicare taxes are not based on the Gross wages but instead they are based on a lower figure. They deduct from the gross: pre-tax medical premiums (medical,dental,vision), Heath Savings accounts.
Therefore if an employee has any of these programs that will decrease the apparent tax rate.
Take your most recent pay stub and check it your self. Also the W-2 you get each year shows social security wages as a separate box.
The FICA payroll taxes of 15.3% (employee 6.2% + 1.45%, and employer 6.2% + 1.45%) apply to earned employment or self-employment income. That is, income you realize from working.
There are many additional sources of personal income, such as:
company pension plan income,
Social Security retirement income,
investment income (capital gains, dividends, interest), and
disability insurance benefits.
None of those kinds of income are subject to FICA payroll taxes (and there are tens of millions receiving Social Security), although this is changing a bit with introduction of the unearned income Medicare contribution tax.
Also worth mentioning: The Social Security / retirement portion of FICA taxes aren't levied on "wages received by certain state or local government workers participating in their employers' alternative retirement system" (Wikipedia source).
For instance, I'm aware that certain school districts in the U.S. provide a "FICA Alternative" retirement plan, with retirement benefits that replace (likely augmenting) what would've been provided by Social Security. If these kinds of plans are common in the public sector (I'm not aware of how common they are), that could account for a good chunk of the difference. I'd expect that payroll contributions directly to a FICA Alternative plan trustee wouldn't be counted as a payroll tax paid to the federal government.
Not sure if this was mentioned, but only the first 8,500 of income is taxed for SSI/Medicare. So the effective rate would be less for those making more than that.
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