Question

Calculation of Social Security Tax and Marginal, Average and Effective Tax Rates on Social Security Taxes (LO. 1)

Rory earns $70,000 per year as a college professor. Latesia is a marketing executive with a salary of $140,000. With respect to the Social Security tax (OASDI: 6.2%; MHI: 1.45%) calculate the following:

(Hint: OASDI 6.2% tax is only on max of $128,400 for the year.)

When required, round the total taxes to two decimal places.

a.

Rory's total FICA taxes: $ Latesia's total FICA taxes: $

Rounding instructions for parts (b), (c), and (d): When required, round the tax rates to two decimal places.

b.

Rory's marginal tax rate: % Latesia's marginal tax rate: %

c.

Rory's average tax rate: % Latesia's average tax rate: %

d.

Rory's effective tax rate: % Latesia's effective tax rate: %

Answer 1

a) For the year 2018, the employee's portion of the FICA tax is 7.65% (the Social Security tax of 6.2% plus the Medicare tax of 1.45%) on the first $128,400 of an employee's salary and wages. On an employee's salary and/or wages in excess of $128,400 the employee's portion of the FICA tax is 1.45%

Rory's total FICA taxes:	$0
Latesia's total FICA taxes:	$9,990.80*

^* for $128,400 @ 7.65% and remaining $11,600 @ 1.45%

b)

MARGINAL TAX	TAX RANGE	TAX
10%	$0-$9,525	10% of your taxable income
12%	$9,525-$38,700	$952.50 + 12% of the amount over $9,525
22%	$38,700-$82,500	$4,453.50 + 22% of the amount over $38,700
24%	$82,500-$157,500	$14,089.50 + 24% of the amount over $82,500

Rory's marginal tax rate:	22%
Latesia's marginal tax rate:	24%

c)total taxes to be paid by Rory $4,453.50+ ($70,000-$38,700)* 22% = $11,339.50

Average rate $11,339.50/$70,000 = 16.20%

total taxes to be paid by Latesia $14,089.50 + ($140,000-$82,500)* 24% = $27,889.50

Average rate $27,889.50/$140,000 = 19.92%

Rory's average tax rate:	16.20%
Latesia's average tax rate:	19.92%

d) Effective tax rate is total tax / taxable income

total tax = income tax + FICA

Rory's effective tax rate:	16.20%
Latesia's effective tax rate:	27.05%