It is your responsibility as an employer to withhold Social Security and Medicare taxes from your employees’ wages. Collectively, these amounts are known as FICA tax withholdings. In English, the acronym FICA refers to the Federal Law on Insurance Contributions.
Additionally, you must match the FICA withholding amount and pay the full amount to federal programs that provide benefits to different segments of the US population.
In this article, we will explain the term withholdings, see how much must be withheld for FICA taxes, and find out what happens to this money. We will also perform a calculation to determine how FICA withholding works in real life.
What are withholdings?
Withholdings are the part of a salary that is not paid to the employee. Instead, the employer pays this withholding to the government in the form of payroll taxes.
It is important to remember that when we refer to payroll withholdings , we are generally talking about a wide range of amounts that come out of an individual’s salary. Payroll withholdings could include:
- Social Security Tax
- Medicare tax
- Federal income tax
- State income tax
- Insurance policy amounts
- Federal unemployment tax
- State unemployment tax
What are FICA taxes?
Withholdings paid for Social Security taxes and Medicare taxes are collectively known as FICA taxes. FICA taxes are the sum of FICA withholdings and the employer’s contribution to these taxes.
But how is that money used?
- Social Security Tax Withholdings : These funds are used to pay retirees, those with disabilities, and the surviving spouses and children of employees who have passed away.
How much is each individual paid in Social Security benefits? The amount varies, but in January 2019, the average Social Security benefit was $ 1,461 per month . Although the maximum amount possible for a person who began collecting Social Security benefits at age 66 in 2019 is $ 2,861 .
- Medicare Tax Withholdings – These funds are used to pay for hospital costs, lab tests, and even home health care for people 65 and older. Younger people with specific disabilities are also covered.
The FICA withholding amounts appear on the W2 form that employers must issue to workers at the end of each year.
Look at the right side of the form. The number 4 refers to “social security tax withheld,” and the serial number 6 refers to “Medicare tax withheld.” Together, these two amounts are the FICA tax.
How to calculate FICA withholdings
The FICA tax withholding is calculated as a percentage of salary. But is the employer required to consider all of the employee’s earnings? The answer is yes.
To calculate this withholding it is necessary to include wages, bonuses, paid vacations and sick time. Any commission paid will also be added.
What about payments in kind? In most cases, goods, food, accommodation and clothing will also be included.
However, certain forms of compensation are excluded. For example, the employer may pay the health or accident insurance premium for a worker or their spouse or dependents. In this situation, the amount of the premium will not be included in the salary to calculate the FICA withholding.
These are the percentages to calculate FICA taxes:
The employer must withhold 6.2% of each employee’s salary for Social Security tax. An additional 1.45% must be withheld for Medicare tax. That assumes a total FICA withholding of 7.65% (6.2% + 1.45% = 7.65%).
* In addition to the 7.65% that is withheld from the employee’s salary, the employer must also contribute another 7.65%. So the total FICA taxes amount to 15.3%.
What if an individual is self-employed?
In this situation, all responsibility for payment rests with that person. The person must pay the total of 15.3% of his net earnings.
There are two other important things about FICA withholding to keep in mind:
- Social Security tax, formally known as the Old Age, Survival and Disability Insurance (OASDI) program, is levied on the first $ 132,900 of earnings. This limit will increase to $ 137,700 in 2020 .
- Earnings above a specified threshold attract an additional 0.9% Medicare tax. The limit amount depends on the marital status of the person:
|Additional Medicare tax|
|Married filing jointly||$ 250,000|
|Married filing separately||$ 125,000|
|Head of household (with qualified person)||$ 200,000|
|Qualifying widow (er) with dependent child||$ 200,000|
FICA Withholding Calculation – A Real Life Example
Let’s look at an example to better understand how the calculation of FICA tax withholdings works:
Julio works in an auto repair shop. Earn $ 600 per week. July’s weekly salary would be subject to the following FICA withholding:
- 6.2% Social Security Tax on $ 600. This equates to $ 37.20.
- 1.45% Medicare tax on $ 600, which is $ 8.70.
The total FICA withholding amount is $ 45.90 ($ 37.20 + $ 8.70)
The employer would be required to add another $ 45.90. The total FICA taxes for July for the week would be $ 91.80. ($ 45.9 + $ 45.0)
You may have noticed that Julio’s full salary is subject to FICA withholding. That’s because your yearly profit is much less than the $ 132,900 limit. Plus, you pay only 1.45% in Medicare taxes. (Your employer pays an additional 1.45%). The additional 0.9% in Medicare taxes is not applicable as Julio’s salary is much lower than the additional Medicare tax threshold.
The law stipulates that FICA tax withholding is mandatory. Employers must withhold Social Security taxes and Medicare taxes from each employee’s wages. The calculation is simple and it should be easy for employers to meet the FICA withholding standards.
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