I’m stuck on this concept of the Old Age and Survivor Disability Insurance (OASDI) and the Health Insurance (HI) tax rate.
The OASDI has a rate of 6.2% and the HI has a rate of 1.45%. What I can’t understand is how much tax should be coming out of a paycheck.
For the OASDI, there is a limit of $106,800 and anything beyond that cannot be taxed. So in a hypothetical situation, if a person makes $32,400 a year, do you multiply the $32,400 by the tax rate of 6.2%? Or is it you subtract the $106,800 from $32,400 and then multiply the 6.2% against the remaining (which in this case would be $74400)?
Yep, generally. There’s some voodoo in exactly how it’s calculated for each paycheck, and there are different factual situations that can change it, but that’s the gist.
What’s “remaining”? You’ve got yourself a negative number there.
If you make less than $106,800 you pay the tax rate of 6.2% of what you make. If you make more than $106,800 you pay tax rate of 6.2% on $106,800.
which means a preson making for example $500,000 would pay the same tax as a person making $106,800.
From the withholding point of view, the payroll department will take 6.2% out of every paycheck until your YTD earnings reach $106,800, then they will stop withholding.
It might help you find more information if you search for Social Security tax (for OASDI) and Medicare tax (for HI). Collectively, the two are known as FICA (Federal Insurance Contributions Act). Your acronyms are not wrong, but they’re not the most often used when talking about payroll tax.
Thanks for your input. It has helped me understand a little better. For those who were confused about the part where I subtracted the $106,800 limit from the salary, that was because it was a poor explanation from a friend.
It was on this sample problem that confused me.
Employee X is paid every Friday. She earned $1,925 for this pay. Prior to the pay of November 12, 2010, she earned $106,350. The FICA taxes to withheld from Employees X’s pay on November 12 are calculated as follows.
OASDI
Taxable Limit…$106,800
Wages paid to date…$106,350
Taxable Wages…$450
Tax Rate…X6.2%
OASDI withheld…$27.90
From what i gather from the comments, essentially, I’m subtracting the Tax limit from the pay to date to find out how much of that paycheck can be taxed before it has to be stopped for OASDI. In other words, out of that $1,925 paycheck, only $450 can be taxed since it has reached the limit for OASDI. with the HI tax, that $1925 can be taxed because there is no such limit on there.
Actually, from a strictly technical perspective, I think that most computerized payroll programs compare the YTD OASDI withholding against the maximum of $6621.60 ($106,800 x 6.2%) in order to avoid rounding errors and make sure the correct total is withheld.