What is FICA tax on my paycheck?

FICA is a federal wage tax. FICA taxes requires withholding from an employee’s gross earnings: 6.2% for social security and 1.45% for Medicare. The employer matches these percentages for a total of 15.3%.

Author: Brad Nakase, Attorney

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What Is an Employer’s Responsibility for FICA Payroll Taxes?

An employer has many responsibilities related to payroll tax withholding and payments. One of the most important obligations is the appropriate payment of what are commonly referred to as FICA taxes. FICA taxes are unique among others in the sense that there is required withholding from an employee’s wages, in addition to an employer’s portion of the taxes that need to be paid.

The Federal Insurance Contributions Act (FICA) is a federal law that requires a business owner to withhold three individual taxes from the wages that he or she pays their employees. FICA is composed of the following three taxes:

  • 2 percent Social Security tax
  • 45 percent Medicare tax (the ‘normal’ Medicare tax)
  • 9 percent Medicare surtax when an employee makes over $200,000 (as of 2009)

An employer is required to withhold these amounts from an employee’s wages.

Under the law, an employer is also required to pay the employer’s portion of the following two taxes:

  • 2 percent Social Security tax
  • 45 percent Medicare tax (the ‘normal’ Medicare tax)

As is evident, the employer’s portion for the regular Medicare tax and the Social Security tax is the same amount that an employer must withhold from their employees’ wages. It should be noted that there are different rules for employees who receive tips. There is no employer portion, however, for the 0.9 percent Medicare surtax on employees who earn high wages.

This essentially means that an employer withholds a 6.2 percent Social Security tax from their employees’ wages while also paying an additional 6.2 percent as their employer share of the tax. Adding together the two percentages, we have 12.4 percent in total. In addition, an employer must withhold a 1.45 percent Medicare tax from their employees’ wages while also paying an additional 1.45 percent as the employer share. Adding together the two percentages, we have 2.9 percent in total. Adding together all four portions (6.2 percent employee Social Security + 6.2 percent employer Social Security + 1.45 percent employee Medicare + 1.45 percent employer Medicare) comes out to 15.3 percent.

In contrast to the other FICA taxes, the 0.9 percent Medicare surtax is applied only to the employee portion. When it comes to the Medicare surtax, also known as the Additional Medicare tax, there is no employer match. An employer withholds the 0.9 percent tax from employee wages and does not need to pay their portion as an employer. In addition, dissimilar to other FICA taxes, an employer withholds the 0.9 percent Medicare surtax only to the extent that wages paid to an employee go above $200,000 in a year. The employer begins withholding the surtax in the pay period where he or she pays wages that go above $200,000 to an employee. The employer will continue to withhold this amount each pay period until the conclusion of the year.

What Are Wage Caps and Floors?

Known as OASDI, the Social Security tax has a dollar limit, which is altered every year to take inflation into account. That said, there is no annual dollar limit when it comes to the 1.45 percent Medicare tax. Different than other FICA taxes, the 0.9 percent Medicare surtax is not withheld unless an employee makes wages in excess of $200,000.

  • Social Security Wage Cap

As of 2017, an employer is obligated to withhold and pay the Social Security tax for an employee until the employee has earned total wages of $127,200. This amount increased from 2016, when it was $118,500.

  • Medicare Wages

There is no cap on the 1.45 percent portions of the Medicare tax, so an employer is required to continue withholding and paying the Medicare tax, no matter what they pay an employee in wages.

  • Medicare Surtax Wage Floor

An employer withholds the 0.9 percent Medicare surtax only to the extent that he or she pays an employee wages that go above $200,000 annually. An employer does not begin withholding the Medicare surtax until the pay period where he or she pays the employee wages that go above the $200,000 mark.

As an example, let us say that an employee is making $170,000 in wages through November 30. On December 1, the employer grants the employee a $50,000 bonus. Before December 1, the employer did not need to withhold the Medicare surtax. On December 1, the employer is required to withhold Additional Medicare Tax on $20,000 of the $50,000 bonus. The employer may not withhold Additional Medicare Tax on the remaining $30,000. He or she must also withhold the additional 0.9 percent Medicare tax on any other wages that were paid to the employee in December.

How to Calculate the Withholding and Employer’s Portion Amounts?

To figure out who much an employer must withhold and how much he or she must pay in Social Security and regular Medicare taxes, he or she must multiple an employee’s gross wage payment by the relevant tax rate.

The Social Security and regular Medicare taxes owed are not impacted by the number of withholding exemptions that an employee may or may not have claimed for the purpose of income tax withholding.

How to Calculate the Medicare Surtax Withholding Amount?

Different from the 6.2 percent Social Security tax and the 1.45 percent Medicare tax, the 0.9 percent surtax is applied only to the employee. An employer withholds the surtax from employee wages, though the employer is not required to make a matching payment.

In terms of obligations toward the Medicare surtax, the employer and employee have different obligations. Sometimes, there might be a mismatch between the amount that must be withheld and the amount that is the employee’s surtax liability.

For the employee, the 0.9 percent Medicare surtax is applied for wages, compensation, and self-employment wages that go above a certain amount based on the employee’s filing status. When that threshold has been reached, the tax applies to all wages that are at present subject to Medicare Tax, the Railroad Retirement Tax Act, or the Self-Employment Compensation Act.

The threshold amounts may be defined as follows:

  • Filing Status: Married filing jointly (Combined Income)| Threshold amount: $250,000

  • Filing Status: Married filing separately | Threshold amount: $125,000

  • Filing Status: Single, Head of Household, Qualifying Widow(er) | Threshold amount: $200,000

The employer will find that his or her obligation to withhold the 0.9 percent Medicare surtax is applicable regardless of whether the employee is liable for the tax. He or she must begin withholding the Medicare surtax as soon as the wages and compensation paid to the employee go above $200,000 in a year. Taxable fringe benefits are included in the calculation, though nontaxable fringe benefits are not included.

The obligation to withhold is applicable only to amounts that go above $200,000. But once an employer is obligated to withhold the Medicare surtax, he or she must continue to withhold it each pay period until the conclusion of the year.

An employer should not consider wages paid by other employers or earnings of the individual’s spouse when making this decision. Even if the employee in question is married and the couple’s combined income does not go over the employee’s $250,000 filing threshold, the employer still needs to withhold the additional tax when the employer’s $200,000 threshold has been reached. The ‘ignore the spouse’s earnings’ rule is applicable even if both spouses work for the same company.

Note: If an employer tips employees, provides taxable fringe benefits, operates his or her business via more than one entity, or has any other non-standard compensation set-ups, then he or she should review the IRS Questions and Answers for the Additional Medicare Tax.

Mismatch Between Employer’s Withholding Obligation and Employee’s Tax Liability

There can be over- or under-withholding problems as a result of the fact that employer withholding is activated at $200,000 per employee per employer while the employee’s tax liability threshold is based on filing status and combined earnings.

Let us say that an employee makes $220,000 during the year 2013. He is married, but his wife does not have any income. When the employee’s earnings go above $200,000, his employer must begin withholding the additional 0.9 percent Medicare tax. Because the couple’s combined income is below the married, filing-jointly threshold of $250,000, the employee will be over-withheld.

Now let us say that an employee earns $130,000 during the year 2013. Her husband makes $100,000 from one employer and $60,000 from another employer during that same year. Their combined earnings are $290,000, which is $40,000 over the threshold for married, filing jointly. That said, none of their employers are required to withhold the 0.9 percent surtax because neither spouse made more than $200,000 from any one employer.

Employees who expect to be under-withheld for the Medicare surtax have the option of making estimated payments. Alternatively, they can request additional income tax withholding on their W-4 form. The employee may then apply the additional withheld income tax against Medicare surtax liability on their 1040 form, known as the U.S. Individual Income Tax Return.

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