As an employer, it is your responsibility to withhold Social Security and Medicare taxes from your employees’ wages. In English, the acronym FICA refers to the Federal Insurance Contributions Act.
In addition, you must match the FICA withholding amount and pay the total amount to federal programs that provide benefits to different segments of the US population.
We will also perform a calculation to determine how FICA withholding works in real life.
What are retentions?
Withholdings are part of a salary that is not paid to the employee. Instead, the employer pays this withholding to the government in payroll taxes.
It’s important to remember that when we refer to payroll withholdings, we generally talk about a wide range of amounts that come out of an individual’s paycheck. 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?
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 use to pay retirees, those with disabilities, and the surviving spouses and children of employees who have died.
How much pay to each individual in Social Security benefits? The amount varies, but in January 2019, the average Social Security benefit was $1,461 per month. Although the maximum possible amount 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 those 65 and older. Younger people with specific disabilities are also covered.
FICA withholding amounts appear on the W2 form that employers must issue to workers at the end of each year.
W2 document showing FICA withholding amounts
Look at the right side of the form. Serial number 4 refers to “social security tax withheld,” and serial number 6 refers to “Medicare tax withheld.” Together, these two sums are the FICA tax.
How to Calculate FICA Withholding
FICA withholding calculates 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 vacation, and sick time.
What about payments in kind?
However, certain forms of compensation exclude. For example, the employer may pay the health or accident insurance premium for a worker or their spouse or dependents. In this situation, the bonus amount will not be included in the salary to calculate the FICA withholding.
These are the percentages to calculate FICA taxes:
The employer must contain 6.2% of each employee’s salary for Social Security tax. That assumes a total FICA withholding of 7.65% (6.2% + 1.45% = 7.65%).
What if an individual is self-employed?
In this situation, all responsibility for payment rests with that person. The person must pay a total of 15.3% of his net earnings.
There are two other essential things about FICA withholding to keep in mind:
- Social Security tax, formally known as the Old-Age, Survivor, 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 specific threshold attract an additional 0.9% Medicare tax.
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 business owners to comply with FICA withholding rules.
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