The Social Security tax is 6.2% and is based on each employee's wages (including salaries, bonuses, commissions, etc.) up to the first $94,200 of annual wages in the year 2006. (The base amount increases each year.) The Social Security tax is withheld from each employee's wages and is also matched by the employer. This makes the total Social Security tax equal to 12.4% of each employee's annual wages up to $94,200.

The Medicare tax is 1.45% and is based on each employee's wages without limit. The Medicare tax is withheld from each employee's wages and is matched by the employer. This makes the total Medicare tax equal to 2.9% on every dollar of wages.

The combination of Social Security taxes and Medicare taxes is referred to as FICA. Often we refer to the FICA tax rate as 7.65% (6.2% Social Security + 1.45% Medicare) of each employee's first $94,200 of annual wages in 2006. Employee wages in excess of $94,200 are taxed only for Medicare at 1.45% for the employee and 1.45% for the employer. This makes the total FICA tax 15.3% (7.65% employee + 7.65% employer) on the first $94,200 and 2.9% (1.45% employee + 1.45% employer) on 2006 wages in excess of $94,200. (Self-employed persons are responsible for both the employee and employer portions.)

Social Security involves retirement and disability benefits. Medicare involves health care for people 65 years of age and older.

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