FICA tax withholding is a percentage of your paycheck that the government has to pass on to you each month. This withholding is calculated using your prior year TIN (Tax Identification Number) and the amount of tax you paid in your previous year. If you’re dealt with a FICA tax withholding notice from the IRS, it’s important to follow the instructions to make sure you’re properly taking care of your taxes. The methods to access and handle FICA tax withholding information vary significantly depending on your employers.
In addition, 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’ll explain the term withholding, see how much should 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 retentions?
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’s important to remember that when we refer to payroll withholding, we’re generally talking 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?
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 died.
How much is paid 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 use to pay for hospital costs, lab tests, and even home health care for people age 65 and older. Younger people with specific disabilities are also cover.
How to Calculate FICA Withholding
FICA withholding is calculate as a percentage of salary. But is the employer require 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. Any commission paid will also be add.
FICA withholding is calculate as a percentage of salary. But is the employer require 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. Any commission paid will also be add.
What about payments in kind? In most cases, property, food, shelter, and clothing will also be include. However, certain forms of compensation are exclude. For example, the employer may pay the health or accident insurance premium for a worker or his or her spouse or dependents. In this situation, the amount of the premium will not be include 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 withhold for Medicare tax. That assumes a total FICA withholding of 7.65% (6.2% + 1.45% = 7.65%).
*In addition to the 7.65% 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 their net earnings.
The important thing 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.
FICA Withholding Calculation: A Real Life Example
Let’s see an example to better understand how the calculation of FICA tax withholdings works:
Julio works in a car repair shop. Earn $600 per week. The weekly wage for July would be subject to the following FICA withholding:
- Social Security Tax of 6.2% on $600 is equates to $37.20
- Medicare tax of 1.45% on $600, which is $8.70
Total FICA withholding amount is $45.90 ($37.20 + $8.70)
The employer would be require to add another $45.90. The total FICA tax for July for the week would be $91.80 ($45.9 + $45.0). You may have noticed that July’s entire salary is subject to FICA withholding. That’s because your annual earnings are 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% Medicare tax is not applicable as the July salary is much lower than the additional Medicare tax threshold.
