How to Compute FICA Taxes

How to Compute FICA Taxes
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The first day on a new job, you're asked to fill out a Form W-4, Employee's Withholding Allowance Certificate. The form provides guidance to your employer as to what money should be withheld from your paycheck for federal income and other taxes that it will deposit on your behalf in a Federal Reserve Bank. To complete the W-4, you must provide bits of information, such as that related to state and federal taxes.

When you receive your first paycheck, it's accompanied by a paystub that tells you what's been deducted from your pay and why. Your Federal Insurance Contribution Act (FICA) payments are found there. Here's some information to help you understand how those amounts are calculated:

Federal Insurance Contribution Act (FICA)

The Federal Insurance Contributions Act imposes two payroll taxes that are deducted from each of your paychecks. Those amounts, as well as your wages for self-employment, are accounted for by the Social Security and Medicare programs according to your Social Security number, which appears on your W-4 form. and W-2 forms. The taxes you pay earn you credits for Social Security and Medicare benefits.

FICA Tax Rates

FICA payments include those made to the Social Security retirement supplement system and the Medicare hospital insurance program. Under FICA, both you and your employer pay half of the totals due, which are 2.9 percent of your earnings for Medicare and 12.4 percent for Social Security. Self-employed persons pay the entire tax themselves.

As an employee in 2020, you'll pay 6.2 percent of your gross wages up to the first $137,700 of your annual salary to Social Security. In turn, your employer(s) will pay a matching amount of 6.2 percent, a total of 12.4 percent.

In 2020, you'll pay 1.45 percent of the first $200,000 of your gross wages and 0.9 percent on wages thereafter. There is no wage base limit for Medicare tax, so all wages are subject to Medicare tax.

Read More: The History of FICA

Calculate Employee FICA Withholding Amounts

To calculate an employee's FICA tax rates, you'll need six pieces of information:

  • The employee's gross pay for the pay period
  • The employee's year-to-date gross pay
  • The Social Security and Medicare withholding rates for the pay period
  • The wage base limit for the Social Security tax
  • The wage base limit for the Medicare tax
  • The total deductions from the employee's gross pay for pre-tax retirement plans

Calculate the employee's gross pay for the pay period for salaried workers. If an employee's annual salary is $57,000, and the person is paid twice a month, the gross pay per paycheck equals $57,000 divided by 24 (2 paychecks per month x 12 months), or $2,375.00 per pay period.

Determine if any deductions should be made from the employee's gross pay for pre-tax retirement plans. In 2020, the employee has no pre-tax deductions for a retirement plan.

Determine if the employee's gross pay is over the Social Security tax wage base limit. In 2020, an employee pays 6.2 percent of the person's gross wages up to the first $137,700 of the employee's annual salary to Social Security. The employee's salary in this example is $57,000, which is less than the wage base limit.

Determine if the employee's gross pay is over the Medicare tax wage base limit. In 2020, an employee pays 1.45 percent of the person's gross wages up to the first $200,000 of the employee's annual salary and 0.9 percent and wages thereafter to Social Security. The employee's salary in this example is $57,000, which is less than the wage base limit.

Calculate the amount to be withheld for Social Security from the employee's gross pay. In 2020, the employee's gross bi-weekly pay is $2,375 per pay period. The Social Security withholding per paycheck equals $2,375 multiplied by 6.2 percent, or $147.25.

Calculate the amount to be withheld for Medicare from the employee's gross pay. In 2020, the employee's gross bi-weekly pay is $2,375 per pay period. The Medicare withholding per paycheck equals $2,375 multiplied by 1.45 percent, or $34.44.

Calculate Employer FICA Payment Amounts

An employer's FICA liabilities for one pay period are equal to those of the employee:

  • 6.2 percent of the employee's semi-monthly FICA wages for Social Security.
  • 1.45 percent of the employee's semi-monthly FICA wages

for Medicare.

Using the figures from the earlier calculation of the employee's FICA liabilities, the employer's liabilities for this employee are $147.25 due to Social Security and $34.44 due to Medicare.

Use Online Calculator or Worksheet

The IRS provides both a Tax Withholding Estimator and a worksheet you can use to estimate your FICA taxes.

When you receive a paycheck, you'll notice that it's accompanied by a paystub that tells you what's been deducted from your pay, such as the Federal Insurance Contribution Act (FICA) payments for Social Security and Medicare. Understanding how those amounts are calculated will help you recognize the benefits of pre-tax retirement plans as well as the cash-in-your-pocket benefit of your next pay raise.