How Do I Calculate the Amount of FICA Tax Withholding?
Every person working in the U.S. as an employee must have FICA taxes withheld from every paycheck by law. FICA taxes include taxes for both Social Security and Medicare. The FICA tax is shared by employees and employers, so one half of the tax is deducted from employee paychecks each payday. The other half, an amount equal to the amount deducted from employee paychecks, must be paid by you as an employer.
The following provides a step-by-step guide to doing the withholding of FICA taxes.
Information Needed for FICA Tax Withholding Calculation
To calculate FICA taxes from an employee's paycheck, you will need to know:
- The amount of gross pay for the employee for that pay period
- The total year-to-date gross pay for that employee
- The Social Security and Medicare withholding rates for that year (see below)
- Any amounts deducted from that employee's pay for pre-tax retirement plans
In addition, you will need to know, for each year:
The Social Security Maximum. This is the maximum wages or salary amount for Social Security withholding for that year. Each year the Social Security Administration publishes a maximum Social Security amount; no Social Security withholding is taken from employee pay above this amount. Go to "Social Security Maximum" to find this year's maximum withholding amount.
The Additional Medicare Tax. The pay amount at which additional Medicare taxes must be withheld from higher paid employees. The pay amount is different depending on the individual's tax status (married, single, etc.) At the specified level for the year, an additional 0.9 percent must be withheld from the employee's pay for the remainder of the year. You must begin deducting the additional 0.9 percent when the employee's wages reach $200,000 for the year, no matter what the employee's marital status is.
FICA Tax Withholding Rates
There are actually two different rate components, broken out as follows:
- The Social Security (OASDI) withholding rate is gross pay times 6.2 percent up to the maximum pay level for that year. This is the employee's portion of the Social Security payment. You as the employer must pay another 6.2 percent with no limit.
- The Medicare withholding rate is gross pay times 1.45 percent, with a possible additional 0.9 percent for highly-paid employees. Your portion as an employer is also 1.45 percent, with no limit, but you don't have to pay the additional 0.9 percent.
- For a total of 7.65 percent withheld, based on the employee's gross pay.
Doing the Calculations for Payroll
Begin your calculation with the employee's gross pay amount for a given pay period.
- The gross pay for a salaried employee is the amount of salary for that period (usually, the employee's annual salary divided by the number of pay periods).
- The gross pay for an hourly employee is the total calculated pay, multiplying hours times hourly rate and including hours for overtime and the overtime rate. For example, if an employee worked 44 hours during a week at $12.50, you would multiply 40 times $12.50 and 4 times the overtime rate.
Determine the amount of employee wages/salaries that are subject to FICA taxes. Eliminate any amounts that are not subject to these taxes.
- Don't subtract any pre-tax deductions or pre-tax retirement plan contributions, such as those for a 401(k) or other qualified retirement plans. These deductions and contributions are subject to FICA taxes, but not federal income tax.
- For higher-paid employees, double check that the employee's year-to-date wages/salaries are not over the Social Security maximum wages for the year. Stop withholding Social Security for the year at the point where the employee's total pay (including overtime and bonuses) reaches the maximum for that year.
Calculate the Social Security deduction, multiplying the current Social Security tax rate by the amount of gross wages subject to Social Security.
Next, calculate the Medicare deduction, multiplying the current Medicare tax rate by the amount of gross wages subject to Medicare. Check to see if the employee has reached the additional Medicare tax level and increase deductions from the employee's pay. The 0.9% additional Medicare tax must be deducted when the employee's wages reach $200,000 each year, and the additional amount is calculated on only the amount over $200,000.
Employer's Portion of FICA Taxes
After you have completed the FICA tax calculations for all employees, you must set aside an amount equal to the total for your employer portion of the FICA taxes. This amount includes:
- 6.2 percent of the employee's total FICA wages for Social Security, and
- 1.45 percent of the employee's total FICA wages for Medicare.
What If I Deducted too Much Social Security Tax?
If you deducted too much tax from an employee's pay, either for Social Security or for Medicare tax, you may have several things to fix:
- Refund the employee. You will need to pay the employee back for the excess deduction amount. You can give this amount back to the employee in a paycheck or as a separate check. Be sure you don't deduct Social Security from this check!
- File a Corrected 941. If the mistake was included in Form 941 (quarterly payroll) report, you will need to file a correction form (941-X) to receive a refund.
- Change the employee's payroll record. Deduct the over-payment of Social Security taxes from the employee's payroll tax record. The W-2 Form for an employee who earns more than $106,800 should show (1) the total amount of pay earned for the year and (2) the total Social Security wages as $106,800. The Medicare wages will be the same as the total amount of pay.
Reporting FICA Tax Withholding
You must report FICA tax withholding:
- To the employee, including both the withholding for the current pay and year to date
- To the IRS on Form 941- the Employer's Quarterly Wage and Tax Report.
- On the employee's W-2 form at the end of the year.
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