If you’ve ever had a job and looked at your paystub, you’ve probably noticed a line for Federal Insurance Contributions Act (FICA) taxes. FICA is a law that states that taxes should be withheld from employees’ paychecks to be used for Social Security and Medicare. It is part of payroll taxes that everyone who earns income is responsible for paying.
What is considered FICA tax on my paycheck?
When you review your paycheck, you’ll see two components that make up your FICA taxes: Social Security and Medicare tax.
Both employers and employees contribute to Social Security and Medicare. Your employer withholds payroll taxes from your income before paying you and sends the government this amount on your behalf.
Your employer matches this contribution and sends their portion to the state and federal government. This matching is automatic but is not reflected on your paycheck.
How much is FICA tax?
When you’re a W-2 employee, your FICA tax is shared between you and your employer:
- 7.65% of your earned income will go to pay FICA taxes.
- Your employer pays an additional 7.65% on your behalf.
If you are self-employed, you’re responsible for paying the full 15.3% at tax time. To avoid a large amount due on your return, you can pay quarterly estimated payments.
What is tax withholding?
Tax withholding refers to money that an employer deducts (or withholds) from your paycheck and pays directly to the government for payroll taxes and federal income taxes. The amount deducted depends on how much money you earn and how you fill out your W-4.
When you start a new job, you will complete a Form W-4. However, you can make changes to your W-4 if you go through a major life event, if the tax laws change, or if you simply want to make an adjustment.
Completing or adjusting your W-4 form can be done easily through your employer. The 2020 IRS redesign simplified Form W-4 to make it easier for taxpayers to calculate their estimated tax liability more accurately. The IRS’s goal is for taxpayers to match their withholding percentage as close to their tax liability as possible. When you file your taxes, you certainly do not want to owe money, but you also don’t want to have an excessive amount withheld from your paycheck throughout the year.
At the end of the year, your total earnings, withheld income, and taxes you’ve paid are reported to you on Form W-2.
Withholding for state taxes
If your state collects income taxes, you will see that a portion of your income was withheld for state taxes on your pay stub. Each state uses a form similar to the W-4 to calculate the amount that should be deducted from your state and local taxes. This is provided by your employer when you start a job.
If you live and work in different states and expect to owe taxes to more than one state, you can elect to have more money withheld from your paycheck to cover the additional tax liability.
What is Social Security Tax?
Social Security tax is paid by both employers and employees to pay for the Social Security program. Millions of Americans benefit from this program every year. Social Security helps provide income for retirement, disability, and survivorship.
Currently, the total rate for Social Security tax is 12.4%. Employees will pay a 6.2% tax rate towards Social Security and employers will pay the remaining 6.2%. Make sure to check your W-4 because this tax is automatically withheld if you are a W-2 employee.
What is Medicare Tax?
Like Social Security, Medicare is a government program that is funded by taxes. This program provides insurance to senior citizens. Medicare tax is paid by everyone who earns income. The current rate for Medicare tax is 2.9% which is split evenly between employer and employee at 1.45%.
FICA vs. federal income tax
While they may seem similar, FICA and federal income tax are calculated differently and serve different purposes. Federal income tax is a progressive tax that varies depending on your earnings and tax filing status. A progressive tax model means the more you earn, the higher the percentage of your income you’ll pay in taxes.
Federal income tax is a comprehensive calculation of all of your overall income, including wages, salaries, and other forms of compensation. As an employee, your employer automatically withholds this tax from your paycheck throughout the year.
Note: Most U.S. states also have a state income tax separate from the federal income tax. However, there are 9 states with no state income tax.
On the other hand, the FICA tax is specifically dedicated to funding Social Security and Medicare programs. These taxes are split evenly between employers and employees, each paying a fixed percentage of the employee’s income.
Unlike federal income tax, which uses a progressive rate system, FICA taxes are calculated at a flat rate. This rate is applied up to a certain income limit for Social Security contributions, while Medicare contributions are not capped at any income level.
Flat tax vs. progressive tax
Generally, progressive tax means the more income you earn, the more tax you will pay. The United States has a progressive tax system that uses tax brackets to determine how much income tax a person should pay.
Income that falls in the lowest tax bracket is taxed at the lowest rate. Any income that exceeds that threshold gets taxed at a higher rate.
Flat tax is a tax that is the same for everyone regardless of their income bracket. Sales tax is an example of a flat tax. Everyone who lives in the same county will pay the same amount of sales tax as set by their area.
What is year-to-date (YTD) pay?
The YTD amounts on your paystub are your year-to-date totals. These summarize the total gross income, deductions, and net income you’ve received since the start of the year. It’s a good idea to keep your pay stubs so you can compare them against your W-2. However, the amount will not always match exactly because your W-2 shows your taxable wages after pre-tax deductions like employer-provided health insurance plans, dental insurance, and 401(k) contributions.
