Understand the FICA Tax Rates to Manage Payroll Effectively- Updated on Mar 07, 2023 - 11:00 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).
Here are the topics to help you with federal payroll withholding taxes:
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|
|Head of household||$200,000|
|Qualifying widow(er) with dependent child||$200,000|
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FICA Tax Rate 2022 & 2023
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%|
|Social Security + Medicare + Additional Medicare||8.55%||7.65%||16.2%|
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FICA Tax Wage Base Limit for 2022 & 2023
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.
|Social Security Tax 2022||Social Security Tax 2023||Medicare Tax|
|Wage Base Limit||$147,000||$160,200||Not Applicable|
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 15.3% up to $160,200 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.
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.
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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