As an employer, it’s your responsibility to withhold Social Security taxes as well as Medicare taxes from your employees’ salaries. Collectively these amounts are known as FICA withholdings. The acronym FICA refers to the Federal Insurance Contributions Act.
You are required to add your own contribution to the FICA withholding sum and pay the total amount into the federal programs that provide benefits to different segments of the American population.
In this post, we’ll explain the term withholdings, see how much needs to be withheld, and find out what happens to this money. We’ll also carry out a calculation to determine how FICA withholding works in real life.
What are withholdings?
Withholdings are a part of a salary that is not paid to the employee. Instead, the employer pays this withholding to the government as payroll taxes.
It’s important to remember that when we refer to payroll withholdings, we’re usually talking about a wide range of amounts that are held back from an individual’s salary. Payroll withholdings could include:
- Social Security tax
- Medicare tax
- Federal income tax
- State income tax
- Amounts for insurance policies
- Federal Unemployment tax
- State Unemployment tax
What are FICA taxes?
The sums paid towards Social Security taxes and Medicare taxes are collectively known as FICA taxes. FICA taxes are the sum of FICA withholding and the employer’s contribution towards these taxes.
But how is that money used?
- Social Security taxes: These go into a trust fund that makes payments to retirees, those with disabilities, and to the surviving spouses and children of employees who have died.
How much is paid out to each individual in Social Security benefits? The sum varies, but in January 2019, the average Social Security benefit was $1,461 per month. Some people got far more than that. The maximum possible amount for a person who began collecting Social Security benefits at age 66 in 2019 is $2,861.
- Medicare taxes: The amounts collected towards Medicare taxes go to pay for hospital costs, lab tests, and even home health care for those over 65. Younger people with specific disabilities are also covered.
FICA withholding amounts appear on the W2 form that employers are required to issue to workers at the end of each year.
Sample W2 form which shows FICA withholding amounts
Look at the right side of the form. Number 4 refers to “Social security tax withheld,” and serial number 6 refers to “Medicare tax withheld.” Together, these two sums add up to the FICA withholding amount.
How to calculate FICA withholdings
FICA withholding is calculated as a percentage of earnings. Is the employer required to consider all earnings? The answer is a qualified yes.
To compute earnings, it’s necessary to include wages, bonuses, and paid vacation and sick time. Any commission paid is to be added, as well.
What about payments in kind? In most instances, goods, food, lodging, and clothing are also to be included.
However, certain forms of compensation are excluded. For example, the employer may pay the accident or health insurance premium for a worker or the worker’s spouse or dependents. In this situation, the premium amount will not be included in the salary to compute FICA withholding.
Here are the percentages for calculating FICA taxes:
The employer is required to withhold 6.2% of wages towards the Social Security tax. An additional 1.45% is to be withheld for Medicare tax. That makes for a total FICA withholding of 7.65% (6.2% + 1.45% = 7.65%.)
*In addition to the employee’s 7.65%, the employer is also required to contribute another 7.65%. So, the total FICA taxes amount to 15.3% of earnings.
What if an individual is self-employed? In this situation, the entire responsibility for payment rests on that individual. The amount to be paid would be 15.3% of net earnings.
There are another two points regarding FICA withholding that you should be aware of:
- The tax for Social Security, which is formally known as Old Age, Survivors, and Disability Insurance program (OASDI), is levied on the first $132,900 of earnings. This is the limit for the year 2019. This limit will go up to $137,700 in 2020.
- Earnings above a specific threshold attract an additional 0.9% Medicare tax. The threshold amount depends on the individual’s filing status:
|Additional Medicare tax|
|Filing status||Threshold Amount|
|Married filing jointly||$250,000|
|Married filing separately||$125,000|
|Head of household (with qualifying person)||$200,000|
|Qualifying widow(er) with dependent child||$200,000|
Calculating FICA withholdings: A real-life example
Let’s look at an example to understand how the FICA withholding calculation works.
Julio is employed at an auto repair shop. He makes $600 a week. Julio’s weekly wage would be subject to the following FICA withholding:
- Social Security tax of 6.2% on $600. This works out to $37.20.
- Medicare tax of 1.45% on $600 = $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 Julio for the week would be $91.80. ($45.9 + $45.0 = $91.80.)
You may have noticed that Julio’s entire salary is subject to FICA withholding. That’s because his annual earning is far less than the limit of $132,900. Additionally, he pays only 1.45% in Medicare taxes. (His employer pays an additional 1.45%.) The extra 0.9% in Medicare taxes is not applicable as Julio’s salary is much lower than the additional Medicare tax threshold.
The bottom line
The law stipulates that FICA withholding is compulsory. Employers are required to withhold Social Security taxes and Medicare taxes from each employee’s salary. As you’ve seen, the calculation is simple, and it should be easy for small business owners to comply with FICA withholding rules.
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