Posted by James Financial Services Inc

Responsibility Of Employers For FICA Payroll Taxes

Responsibility Of Employers For FICA Payroll Taxes

Most Americans are familiar with federal and state income taxes, but payroll taxes are not well understood.

Payroll taxes are types of taxes applied to earned income: wages, salaries, bonuses, and income from a business in which you are actively involved. The payroll tax in the United States has two components: Social Security and Medicare.

Federal tax obligations in employer payroll include withholding an employee's payment and paying employer social security taxes and Medicare taxes per the Federal Insurance Contribution Act (FICA).

Employers have various payroll deductions and payment obligations. Of the utmost importance is the correct payment of what is commonly referred to as FICA taxes. FICA taxes are somewhat unique in that they require a withholding tax on the employee's salary and the share of taxes that the employer must pay.

The Federal Insurance Contribution Act (FICA) is the federal law that requires you to withhold three taxes in addition to the wages you pay your employees. The FICA includes the following taxes:

  • 0.9% additional Medicare fee when an employee earns more than $200,000. (additional Medicare tax).

  • 1.45% Medicare tax (Regular Medicare tax)

  • 6.2% social security taxes

You must deduct these amounts from an employee's salary.

You are also required by law to pay the employer's share of two of these taxes:

  • 1.45% Medicare tax (Regular Medicare tax)

  • 6.2% social security taxes

As you can see, the employer's share of Social Security tax and regular Medicare tax is the same amount it has to withhold from employee salaries. Do note that different rules apply to employees who receive tips.

The total of the four portions is 15.3% (The 6.2% employee portion for social security plus 6.2% of employer's share of social security plus 1.45% of employee's share of Medicare plus 1.45 % of the employer's share in Medicare).

There is no employer contribution to Medicare's additional 0.9% tax for high-income employees.


Salary bases and limits

The Social Security tax is subject to a dollar limit adjusted annually for inflation. For 2020, your obligation to withhold and pay an employee's Social Security tax ends when you pay that employee's full salary of $132,900.

There is no limit to the 1.45% Medicare tax rate. You must continue to withhold and pay Medicare taxes, regardless of how much you pay an employee.

You will only withhold 0.9% of the additional Medicare tax if you pay an employee's salary over $200,000 per calendar year. Do not start withholding additional Medicare tax before you pay over $200,000 to an employee.


Calculation of withholding and employer's portion amounts

Simply multiply an employee's gross salary by the applicable tax rate to determine how much to withhold and how much to pay in Social Security and Medicare taxes.

Normal social security and health insurance taxes are not affected by the amount of withholding tax exemptions an employee may have claimed for withholding tax purposes.

Employer and employee obligations with respect to the additional Medicare taxes are different. There may be a "gap" between the amounts to be withheld and the employee's amount of tax payable in some cases. This is because your employer's withholding tax is $200,000 per employee, while the employee's tax liability limit is based on filing status and combined income. This can create problems with excessive or insufficient restraint.

For example, you can pay an employee less than $200,000, which means that you do not have to withhold additional tax, but the total income of that employee may exceed the limit for which he/she is liable for the tax.

Since the employer does not withhold 0.9% of the additional Medicare tax, the employee must pay the tax. Employees who intend to withhold additional lower health insurance charges can make estimated payments or request additional withholding taxes on Form W-4.

In short, all employers must deduct Social Security and Medicare amounts from their employees' wages and pay the employer and employees a portion of the tax to the IRS. If you need help calculating the amounts to deduct and pay, please contact JAMES FINANCIAL SERVICES, INC.


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