How to Calculate Federal Payroll Taxes for a Single Person

How to Calculate Federal Payroll Taxes for a Single Person
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With more than one-third of the United States' economy made up of freelance, seasonal and gig workers, and with the Bureau of Labor Statistics predicting that number will grow to 43 percent in 2020, increasingly this segment of workers must learn to calculate payroll taxes, withhold them and remit them. Without an HR department to take care of this automatically, whether the taxpayer files with single filing status, married or as head of household, it is important to calculate these taxes properly and make payments on time.

Federal Payroll Taxes

Federal payroll taxes can be a little confusing because there is a tendency to interchange the name of the tax associated with the legislation that established it, and the more colloquial and descriptive name. The term "federal payroll taxes" is the more common one used, whereas FICA is the acronym that stands for the Federal Insurance Contributions Act, the legislative name given when it was introduced in Congress. Federal payroll taxes is a phrase that is interchangeable with FICA.

FICA is an umbrella term that includes both Social Security and Medicare. Social Security is the more common term used instead of OASDI. OASDI is the acronym that stands for the Old Age, Survivors, and Disability Insurance, the legislative name given to the bill when introduced in Congress. Social Security tax and OASDI tax are interchangeable.

Employers are required by law to withhold these taxes from your pay and remit them quarterly to the U.S. government. If you work for an employer and receive a paycheck, you’ll recognize these deductions from your gross earnings, and while they may be identified using one or the other of these interchangeable terms, one line will be for Social Security (or OASDI) and the other will be for Medicare. Calculation of these taxes is simple, but nuanced.

What are Federal Payroll Taxes Used For?

Social Security and Medicare are safety net programs that workers fund from current employment earnings and realize the benefits once they are retired. Social Security is a key source of income, and Medicare is a key source of medical expense payment, once retired. For many people, these programs are the sole or primary sources of financial stability after retirement.

Understanding Social Security (OASDI) Taxes

The Social Security Tax is ​12.4 percent​ of gross earnings, but half of this amount is paid by the worker’s employer and half is paid by the employee. If, for example, you have gross earnings of $1,000 per pay period, your Social Security withholding is $62 for that period. That is, $1,000 times 6.2 percent, which is your portion of the tax. Your employer will remit to the federal government $124 in total – the $62 that was withheld on your behalf and another $62 they are required to pay for you, from their gross earnings.

There is an annual earnings cap for Social Security. For 2020, that cap is ​$137,700​. This means that the maximum Social Security tax that will be withheld for an employee is $8,537.40. For every dollar you earn above $137,700, you get to keep an extra 6.2 cents. The cap increases over time and in 2021 will be ​$142,800​.

One additional nuance for higher-paid individuals who change jobs part way through the year is that they could have a total Social Security tax withheld that exceeds the $8,537.40 limit. For instance, let’s say your annual salary is $180,000 and you work exactly half the year at one employer and half the year at another employer. Because each employer is required to withhold 6.2 percent from the first earned dollar up to the $137,700 cap, and the second employer can’t take into account amounts withheld by the first employer, you’ll have $5,580 withheld by each employer (half of $180,000 is $90,000, and $90,000 times 6.2 percent equals $5,580).

Having $5,580 withheld by each employer results in $2,622.60 withheld in excess of the annual limit (that is $5,580 + $5,580 = $11,160 and $11,160 - $8,537.40 = $2,622.60). When you file your income tax return, you’ll claim this excess Social Security Tax withheld as a credit, on Schedule 3 of Form 1040. It will offset any tax due or come back to you as a refund.

Exploring Medicare Taxes

Medicare tax is ​2.9 percent ​of a worker’s gross earnings. Similar to Social Security, this tax is split and funded half by the employee and half by the employer. For those earning more than $200,000, the individual tax increases from 1.45 percent (half of the 2.9 percent) to 2.35 percent and continues without a cap. In our example of an employee who earns $1,000 per pay period, the Medicare withholding would be $14.50 for that pay period.

Implications for Single Filing Status

Federal payroll taxes are not impacted by the individual’s tax filing status. Whether single or married, the 6.2 percent and 1.45 percent withholding rates are the same.

Implications for the Self-Employed

If you’re self-employed, you need to calculate and remit these taxes quarterly. And since you are both employer and employee, you will remit ​12.4 percent​ for Social Security tax and ​2.9 percent​ for Medicare tax.