Deductions – What Are They and What’s Their Purpose?
If you’re like many Americans, you have looked down at your check stub and thought, “Why did so much money get taken out?!” You’re not alone on that. The reason is called deductions. Although they seem pesky, it is important to understand them and to know why they are beneficial.
Under the Federal Insurance Contributions Act (FICA), two types of taxes were created, Medicare and Social Security. The deductions for both are set at varying percentages, but Social Security has always been higher than Medicare. The objective for these taxes is to assist the lives of retirees. Essentially, you work and pay into these taxes throughout your life, then you can collect the benefits you have been paying into when you retire.
There are also Federal and State taxes that are deducted from your check stub. Although these do not benefit you when you retire, they do provide funding for services that benefit the community and those in need. Short term, they also benefit you when tax season comes around if you happen to get a tax refund check.
All four of these deductions are important to calculate correctly. If they are not done properly, it can be detrimental to your retirement, it can cause trouble to you financially, and you can even get fined or imprisoned for incorrectly paying your federal/state taxes. Check Stub Maker can help by seamlessly calculating all the tax laws that are pertinent to your business. You can witness it for yourself by building your own sample check stub. Continue reading to learn more about Medicare and Social Security deductions.
The section you see on your check stub labeled “FICA – Medicare” is a deduction that goes to the Medicare program. It ensures that every American over 65 years old has federal insurance in the event of a medical emergency. The current tax rate for the Medicare deduction is 1.45% of the gross earnings from the employee. Employers are required to match that payment as well.
For those self-employed, make sure to still pay this when you complete your self-employment tax. Instead of 1.45%, you will be paying 2.9% of your total income to make up for both the employee and the employer element that is normally deducted from your check stub.
Social Security deductions
Medicare and Social Security deductions are similar. They both go towards the goal of retirement after the age of 65. Social Security ensures that you will have federal disability and retirement benefits available to you.
Much like Medicare, Social Security requires both the employee and the employer to pay into it with a current tax percentage of 6.2% if the employee earned less than $132,900. Once again, if the individual is self-employed, they are obligated to pay both the employee and the employer, totaling 12.4% of total gross earnings.
Following all FICA regulations can be challenging as there are numerous laws that requires rigid accuracy. Here at Check Stub Maker, we make all those complicated issues simplified. Try it yourself by building your own pay stub! Our system calculates every tax deduction instantly and accurately. Experience the ease of creating your own check stub and not having to worry if the deductions are correct.