Business Mathematics Brief 12th Edition by Stanley Salzman ,Gary Clendenen, Charles Miller

Exercise 9

A young person who has just received her first paycheck is puzzled by the amounts that have been deducted from gross earnings. Briefly explain both the FICA and Medicare deductions to this person. (See Objectives 1-2.)
OBJECTIVE Understand FICA. The Great Depression of the 1930's was very difficult for many elderly people. President Franklin D. Roosevelt and Congress responded by passing the Federal Insurance Contributions Act (FICA) which created a plan called Social Security. The plan required all employees, employers, and self-employed individuals to make regular contributions from wages and self-employment income. In turn, it generated monthly benefits for retired workers, spouses of retired workers, and disabled workers. The table below shows that the maximum annual contribution for high earning individuals has increased from $45 (1.5, of $3000) in 1950 to $7049.40 (6.2, of $113,700) in 2013.
Medicare was established in the 1960s to help those 65 and over, as well as younger people with disabilities, pay medical expenses. This program spreads the risk related to the costs of illness across a large group of people. It too requires contributions from employees, employers, and self-employed.

*The Health Care Act of 2010 results in yet higher Medicare taxes for high-income individuals and couples. We will not discuss these in the book.
The contributions listed in the table above are paid by employees - just look at any payroll statement to see amounts withheld for FICA and Medicare. It is important to realize that the employer also pays the same rate as the employee into both systems, thereby matching employee contributions. Self-employed people pay nearly double the amount paid by workers.
Whether a citizen or not, every employee must have a Social Security card. Applications for a Social Security card are made through Social Security offices or at most post offices. Each year the Social Security Administration sends out a statement to every worker showing past contributions and providing an estimate of future benefits. Since mistakes do occur, it is important to check the statements carefully. There is a limit of about three years, after which errors may not be corrected. You can obtain the necessary forms or get other information from the Social Security at 800-772-1213 or www.socialsecurity.gov.
The maximum earnings subject to Social Security as well as the tax rates for both Social Security and Medicare are determined by Congress. Since at least some these numbers change almost every year, we will use the following to find Social Security tax and Medicare tax throughout the book.

You may wonder where these funds are used. Social Security provides more than one-half the income for about two-thirds of older Americans and Medicare pays medical bills for more than 50 million people. Someone in your family may either be receiving benefits now, or perhaps will receive benefits in the near future. Without Social Security and Medicare, there would be a lot more poverty among the elderly and disabled.
Find FICA tax and Medicare tax. Remember to always use current rates and maximum income when finding the amount to be withheld for Social Security and Medicare.