Social security and Medicare taxes

Social security and Medicare taxes, also known as FICA taxes, must be withheld from the employee's wages. The employer must also pay a matching amount of FICA taxes for employees.

1. Social Security Tax: As of 2007, the employer must withhold 6.2% of an employee's wages and pay a matching amount in social security taxes until the employee reaches the wage base for the year. The combined total for the employee and the employer is equal to 12.4% of gross compensation. The wage base for social security tax in 2007 is $97,500. Once that amount is earned for a given year, neither the employee nor the employer owe any additional social security tax for that year.

2. Medicare Tax: As of 2007, the employer must withhold 1.45% of an employee's wages and must pay a matching amount for Medicare tax. The combined total for the employee and the employer is equal to 2.9% of gross compensation. Unlike the Social security tax, there is no maximum wage base for the Medicare portion of the FICA tax. Both the employer and the employee continue to incur and pay Medicare tax on each additional amount of gross compensation, with no limit on the amount of gross compensation on which the tax is imposed.