Every payday, part of your employees’ paychecks is withheld and paid to the government. In the case of Social Security and Medicare taxes, you pay the same amount for the employer portion as your employees pay for their portion. The income generated is used to provide funding for various government programs. Find out how these taxes work so you have a clearer understanding of what to withhold to remain in compliance with laws and regulations.
Federal Insurance Contributions Act Tax
The Federal Insurance Contributions Act (FICA) is the law requiring you to withhold Social Security and Medicare taxes from employee wages. The Social Security tax is 6.2%, and the Medicare tax is 1.45%. A Medicare surtax of 0.9% applies for each employee earning over $200,000 annually. Except for not having to pay a Medicare surtax, you’re required to pay the same amount for the employer portion as you withhold from employees’ wages. As a result, a total of 12.4% for Social Security tax and 2.9% for Medicare tax, for a sum of 15.3%, is paid as FICA tax. For each employee earning over $200,000 annually, including the 0.9% Medicare surtax, the total FICA tax is 15.39%.
Wage Caps and Floors
The Social Security tax is subject to a dollar limit annually adjusted for inflation. For 2019, your obligation to withhold and to pay the Social Security tax for an employee ends once you’ve paid that employee total wages of $132,900. Because there is no limit for the 1.45% Medicare tax, you must withhold and pay the Medicare tax regardless of how much you pay an employee. For the 0.9% Medicare surtax, you begin withholding the surtax in the pay period when you pay wages in excess of $200,000.
Calculating the Withholding and Employer Tax Portions
To determine the withholding and employer portion of Social Security and regular Medicare taxes, multiply an employee’s gross wage payment by the applicable tax rate. Determining the Medicare surtax withholding amount for employees earning more than $200,000 in one calendar year depends on wages, compensation, and self-employment earnings above a threshold based on the employee’s filing status. The 2019 threshold amounts are $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for single, head of household, or qualifying widow(er). Once the threshold is reached, the tax applies to all wages currently subject to Medicare tax, the Railroad Retirement Tax Act, or the Self-Employment Compensation Act. Any taxable fringe benefits are included in this computation. Once you are obligated to begin withholding the Medicare surtax, continue to withhold it each pay period until the end of the calendar year.