Understand the FICA Tax Rates to Manage Payroll Effectively

- Updated on August 24, 2020 - 10:30 AM by Admin, 123PayStubs

Employers deduct a certain amount from employee paychecks to pay federal income tax, Social Security tax, Medicare 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).

What are FICA Taxes?

Federal Insurance Contributions Act (FICA) is an act that mandates withholding of taxes from employees’ paycheck and matching 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?

The 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?

The 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.

Additional Medicare Tax

An additional Medicare tax is applicable to employees whose wages exceed a certain threshold limit. The threshold limit is based on the employee’s filing status.
The additional Medicare tax rate is 0.9%. Below is the threshold limit based on filing status:

Filing Status Threshold Limit
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household $200,000
Qualifying widow(er) with dependent child $200,000

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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 Employer Contribution Total
Social Security Tax 6.2% 6.2% 12.4%
Medicare Tax 1.45% 1.45% 2.9%
Additional Medicare 0.9% - 0.9%
Social Security + Medicare + Additional Medicare 8.55% 7.65% 16.2%

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FICA Tax Wage Base Limit for 2020

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.

The Wage Base Limit 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.

Social Security Tax Medicare Tax
Wage Base Limit $137,700 Not Applicable

Note: 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.

Self-Employment Contributions Act (SECA) taxes 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% Medicare tax on their entire net earnings. An additional Medicare tax rate of 0.9% is applicable to the threshold amount mentioned.

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 based on Publication 15. The amount withheld will be based on the information the employee provided on their federal Form W-4.

State Income Tax

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

Local Income Tax

The tax withheld from the employee paycheck towards the local income tax. The amount withheld will be based on the rates set by the local cities and jurisdictions.

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. Employers contribute to this program, and in some states, employees are also required to contribute to this program.

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