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).
What is FICA?
FICA stands for the Federal Insurance Contributions Act and is the federal law requiring payroll contributions for the funding of Social Security and Medicare programs. Employers have a legal responsibility to withhold Social Security and Medicare taxes from the wages paid to employees and remit them to the IRS. Commonly known as FICA tax, these taxes are deducted from each paycheck.
Who pays FICA taxes?
Both employees and employers pay FICA taxes. Employers have numerous payroll tax withholding and payment obligations. Of the utmost importance is the proper payment of 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.
FICA taxes withheld from an employee's wages:
- 6.2 percent Social Security tax;
- 1.45 percent Medicare tax (the “regular” Medicare tax); and
- Since 2013, the Additional Medicare Tax of 0.9 percent when the employee earns over $200,000.
The law also requires the employer to pay an employer's portion of Social Security and Medicare taxes.
FICA taxes owed by the employer:
- 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.) There is no employer portion for the 0.9 percent additional Medicare tax on high-earning employees.
In other words, you withhold a 6.2 percent Social Security tax from your employee’s wages and you pay an additional 6.2 percent as your employer share of the tax (6.2 employee portion + 6.2 employer portion = 12.4 percent total). Also, you withhold a 1.45 percent Medicare tax from your employee’s wages and you pay an additional 1.45 percent as your employer share (1.45 employee portion + 1.45 employer portion = 2.9 percent total). The total of all four portions is 15.3 percent (6.2 percent employee portion of Social Security + 6.2 percent employer portion of Social Security + 1.45 percent employee portion of Medicare + 1.45 percent employer portion of Medicare = 15.3 percent).
Unlike the other FICA taxes, the 0.9 percent Medicare surtax is imposed on the employee portion only. There is no employer match for the Medicare surtax (also called the Additional Medicare Tax). You withhold this 0.9 percent tax from employee wages, and you do not pay an employer’s portion. Also, unlike the other FICA taxes, you withhold the 0.9 percent Medicare surtax only to the extent that wages paid to an employee exceed $200,000 in a calendar year. You begin withholding the surtax in the pay period in which you pay wages in excess of this $200,000 “floor” to an employee, and you continue to withhold it each pay period until the end of the calendar year.
FICA limits: Wage caps and floors
The Social Security tax (also called OASDI or Old-Age, Survivors, and Disability Insurance) is subject to a dollar limit, which is adjusted annually for inflation.
However, there is no annual dollar limit for the 1.45 percent Medicare tax. And unlike the other FICA taxes, the 0.9 percent Medicare surtax is not withheld unless wages paid to an employee exceed $200,000.
Social security wage cap
For 2023, your obligation to withhold and to pay the Social Security tax for an employee ends once you've paid that employee total wages of $160,200. (For 2022, the amount is $147,000.)
No Medicare wage cap
As there is no ceiling on the 1.45 percent portion of the Medicare tax, you must continue to withhold and pay the Medicare tax regardless of how much you pay an employee.
Additional Medicare Tax wage floor
You withhold the 0.9 percent Medicare surtax only to the extent you pay an employee wages in excess of $200,000 in a calendar year. You do not begin withholding the Medicare surtax until the pay period in which you pay wages in excess of $200,000 to an employee. There is no employer share. You withhold the 0.9 percent surtax from employee wages.
Example
Trevor, your employee, received $170,000 in wages from you through November 30, 2022. On December 1, 2022, you pay Trevor a $50,000 bonus. Prior to December 1, you were not required to withhold the Medicare tax surcharge. On December 1, you are required to withhold Additional Medicare Tax on $20,000 of the $50,000 bonus. You may not withhold Additional Medicare Tax on the other $30,000. You must also withhold the additional 0.9 percent Medicare tax on any other wages paid to Trevor in December 2022.
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.
Calculating the Additional Medicare Tax withholding amount
Unlike the 6.2 percent Social Security tax and the 1.45 percent Medicare tax, the 0.9 percent surcharge is imposed only on the employee. You withhold the surtax from employee wages, but there is never a matching payment required by the employer.
The employer’s and employee’s obligations with respect to the Medicare surtax 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 surtax liability.
From the employee’s perspective, the 0.9 percent Medicare surtax is imposed on wages, compensation, and self-employment earnings above a threshold amount that is based on the employee’s filing status. Once the threshold is reached, the tax applies to all wages that are currently subject to Medicare tax, to the Railroad Retirement Tax Act, or to the Self-Employment Contributions Act (SECA).
The threshold amounts are as follows: