How does the Social Security wage base limit affect FICA taxes?

• A. OASDI is taxed on all wages; Medicare tax applies to all wages.
• B. OASDI is taxed only on wages up to the annual wage base; wages above the base are not subject to OASDI tax; Medicare tax applies to all wages.
• C. OASDI and Medicare both taxed only up to the wage base.
• D. Both OASDI and Medicare are exempt after reaching wage base.

Answer: (B)

The main idea is that the Social Security portion of FICA has a cap, while Medicare does not. OASDI is taxed only on wages up to the annual wage base; once earnings reach that base, no OASDI tax applies to the excess. Medicare tax, however, is taken on all wages with no cap (plus any applicable Additional Medicare Tax for high earners). So as pay rises, the Social Security tax stops at the base, but Medicare tax keeps applying. This is why the correct description is that OASDI is taxed up to the annual wage base and wages above that are not subject to OASDI tax, while Medicare tax applies to all wages.