Understand FICA Tax and Wage Base Limit to Manage Payroll Effectively

- Updated on May 07, 2020 - 11:00 AM by 123PayStubs Team

Employers deduct a certain amount from employee paychecks to pay federal income tax, Social Security tax, Medicare (Hospital Insurance) tax, and state income tax if any.

Of these, the Social Security tax and Medicare tax added together are referred to as the Federal Insurance Contributions Act (FICA).

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What is FICA?

Federal Insurance Contributions Act (FICA) is a federal payroll program that withholds taxes from employees’ paycheck and matches that with an equal contribution from the employer to fund the Social Security and Medicare Program.

FICA tax deductions provide benefits to older Americans, retired people, widows and widowers, children who have lost working parents, disabled workers who qualify for benefits, and children of deceased workers.

What is the Social Security Program?

Social Security Program is to protect people who have lost their earnings due to retirement or disability and for survivors of deceased workers.

Monthly benefits are paid to these beneficiaries from the Social Security Fund. The funds to this program are raised primarily through the payroll taxes paid by the employer for their employees and self-employed individuals.

What is the Medicare Program?

Medicare program provides health coverage for senior citizens or older adults aged above 65+. The program is funded by payroll taxes paid by the employees with matching contributions from their employer, and also self-employed individuals.

FICA Tax Rates 2020

FICA tax is a combination of social security tax and medicare tax. The taxes imposed on social security tax will be 6.2% and 1.45% for Medicare tax for each employee with matching contributions from their employer.

FICA Tax Rates Employee Contribution EmployerContribution Total
Social Security Tax 6.2% 6.2% 12.4%
Medicare Tax 1.45% 1.45% 2.9%
Social Security + Medicare 7.65% 7.65% 15.3%

FICA Tax Wage Base Limit

The Wage Base Limit is the annual limit on the wages earned for which the social security tax is paid. It is set on a yearly basis and adjusted based on the change in wage growth. This wage base limit will change every year.

Why is Wage Base Limit Important?

One of the main reasons the Wage Base Limit is important is that it helps determine the maximum amount to social security tax to be withheld. That's because the employee wages are taxed only to a certain limit.

Wage Base Limit for Social Security Tax

  • For 2020, the wage base limit for the social security tax is $137,700.
  • For 2020, Social security and medicare taxes also apply to wages paid to household employees if the wages are $2,200 or more in cash.

Wage Base Limit for Medicare Tax

  • For medicare tax, there is no wage base limit as all the covered wages are subjected to a medicare tax.
  • An additional 0.9% medicare tax is applicable when the wages exceed $200,000 if the employee is a single filer or $250,000 if filing jointly.

How Wage Base Limit applies for self-employed?

The process of wage base limit is a little different for the self-employed as they act as both employee and employer.

Self-employed individuals pay a combined employer and employee amount towards social security taxes, which is at 12.4% up to $137,700 on their net earnings. They also pay a 2.9 percent Medicare tax on their entire net earnings.

But the self-employed individuals are allowed to claim the deduction for half of the social security tax to reduce their taxable income.

Other withholding taxes in payroll

Apart from social security and medicare taxes, payroll taxes have other tax components mentioned below:

Federal Income Tax

The tax withheld from the employee paycheck towards the federal income tax. The amount withheld will be based on the information the employee provided on their Form W-4.

State Income Tax

The tax withheld from the employee paycheck towards the federal income tax. The amount withheld will be based on the information the employee provided on their Form W-4.

Local Income Tax

The tax withheld from the employee paycheck towards the federal income tax. The amount withheld will be based on the information the employee provided on their Form W-4.

FUTA Tax

The Federal Unemployment Tax Act (FUTA) is used to fund the federal unemployment program that benefits people who lose their job. No taxes are withheld from the employee paycheck towards FUTA tax. Only the employer contributes to this program.

SUTA Tax

The State Unemployment Tax Act (SUTA), quite similar to the FUTA tax, is to fund the state unemployment program that benefits people who lose their job. Only the employer contributes to this program, and no taxes are withheld from the employee paycheck.

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