Author: Elliot Gajadhar, Director of Product Development, 1-800Accountant
An employer's federal payroll tax responsibilities include withholding from an employee's compensation and paying an employer's contribution for Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA).
Employers have numerous payroll tax withholding and payment obligations. Of the utmost importance is the proper payment of what are commonly known as FICA taxes. FICA taxes are somewhat unique in that there is required withholding from an employee's wages as well as an employer's portion of the taxes that must be paid.
The Federal Insurance Contributions Act (FICA) is the federal law that requires you to withhold three separate taxes from the wages you pay your employees. FICA is comprised of the following taxes:
- 6.2 percent Social Security tax
- 1.45 percent Medicare tax (the “regular” Medicare tax)
- 0.9 percent Medicare surtax when the employee earns over $200,000. (The additional Medicare tax.)
You must withhold these amounts from an employee's wages.
The law also requires you to pay the employer's portion of two of these taxes:
- 6.2 percent Social Security tax
- 1.45 percent Medicare tax (the “regular” Medicare tax).
As you can see, the employer’s portion for the Social Security tax and the regular Medicare tax is the same amount that you're required to withhold from your employees' wages. (Different rules apply for employees who receive tips.)
The total of all four portions is 15.3 percent. (The 6.2 percent employee portion of Social Security plus 6.2 percent employer portion of Social Security plus 1.45 percent employee portion of Medicare plus 1.45 percent employer portion of Medicare equals 15.3 percent).
There is no employer portion for the 0.9 percent additional Medicare tax on higher-earning employees.
Wage Caps and Floors
The Social Security tax (also called OASDI) is subject to a dollar limit, which is adjusted annually 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.
There is no ceiling on the 1.45 percent portion of the Medicare tax. You must continue to withhold and to pay the Medicare tax regardless of how much you pay an employee.
You withhold the 0.9 percent additional Medicare tax only to the extent you pay wages to an employee in excess of $200,000 in a calendar year. You do not begin withholding the additional Medicare tax until the pay period in which you pay wages in excess of $200,000 to an employee.
Calculating the Withholding and Employer's Portion Amounts
You simply multiply an employee's gross wage payment by the applicable tax rate to determine how much you must withhold and how much you must pay in Social Security and regular Medicare taxes.
The Social Security and regular Medicare taxes owed are unaffected by the number of withholding exemptions an employee may have claimed for income tax withholding purposes.
The employer’s and employee’s obligations with respect to the additional Medicare tax are different. In some cases, there may be a “mismatch” between the amounts you are obligated to withhold and the amount of your employee’s tax liability. That is because your employer withholding is triggered at $200,000 per employee, while your employee’s tax liability threshold is based on filing status and combined earnings. This can create over- or under-withholding issues.
For example, you may pay an employee less than $200,000—meaning you are not obligated to withhold the additional tax—but that employee’s total income may be above the threshold at which he or she is liable for the tax.
To the extent the employer does not withhold the 0.9 percent additional Medicare tax, the employee must pay the tax. Employees who anticipate being under-withheld for the additional Medicare tax can make estimated payments or they can request additional income tax withholding on Form W-4.
To sum up, all employers must deduct the Social Security tax and Medicare tax amounts from the paychecks of their employees and pay the employer and employee portion of the tax to the Internal Revenue Service. If you need assistance in calculating the amounts you are required to deduct and pay, you should contact a tax professional.
About the Author
Elliot Gajadhar is a Director of Product Development at 1-800Accountant, and he’s a CPA licensed in the state of New York. He has an MBA from Pace University and has extensive experience in tax planning for Small Businesses across various industries.