How FICA Payroll Taxes Impact Your Take-Home Pay
From an employee’s perspective, payroll taxes can be confusing. Ensuring employers accurately file these employment taxes is critical to avoid penalties and back tax payments.
FICA (Federal Insurance Contributions Act) taxes are the familiar government deductions from paychecks that fund Social Security and Medicare benefits for tens of millions of Americans. These taxes account for 15.3% of all wages.
FICA taxes are one of many deductions from employee paychecks. The amount your employer withholds from your monthly pay depends on the information you provide on a W-4 Form. Your employer may also withhold federal and state income tax, among other things.
Payroll taxes are levied on both employers and employees to fund Social Security, Medicare, and other government programs. The money is invested in a trust fund that benefits retired workers and their families.
The current wage base limit means that Social Security taxes apply to the first $168,600 of an employee’s annual wages. Workers who earn more than that threshold owe an additional 0.9% Medicare tax.
The federal government uses payroll taxes to collect most of its revenue after income taxes. That’s why knowing how these taxes impact your take-home pay is essential. NerdWallet writers are subject matter experts who use primary, trustworthy sources to inform their work, including peer-reviewed studies, government websites, and academic research. They are backed by rigorous fact-checking and editorial standards that ensure NerdWallet’s content is accurate, up-to-date, and comprehensive.
In addition to Social Security taxes, employees also have Medicare hospital insurance taxes deducted from their paychecks. This tax is required by law and helps fund subsidized healthcare for retirees. The accumulated Medicare tax payments also determine whether an employee is eligible for premium-free Medicare Part A coverage.
The FICA payroll tax rate is 15.3 percent of an employee’s gross wages minus pre-tax deductions. Of the total, 6.2 percent goes toward Social Security taxes, and 1.45 percent goes toward Medicare taxes. Employers must match these amounts.
Employees should save their last pay stub for comparison with their W-2 at year-end to verify that the amount of FICA taxes they paid matches up. If you notice discrepancies, you may need to contact your payroll department. FICA withholding is unique because it’s a mandatory payroll tax that is both an employee and employer obligation. For this reason, using accurate payroll software to calculate FICA taxes and deductions for you is essential. Patriot’s free online payroll system does just this! Give it a try today.
Medicare Part B
FICA taxes are a type of employment tax withholding that is required to be paid by employees and employers alike. While they do take a chunk out of your paycheck, these deductions are essentially paying for two things that can significantly benefit you in the long run: Social Security benefits and Medicare hospital insurance.
FICA tax (Federal Insurance Contributions Act) taxes are withheld from paychecks and matched by employers, meaning that the employee and employer contribute 7.65% of their earnings to these programs. The Social Security portion of this tax funds retirement benefits, and the Medicare part pays for hospital insurance and other supplemental coverage such as prescription drugs.
Both employees and small business owners need to understand and accurately calculate their FICA payroll taxes because if you fail to pay your correct amount, you could face significant back tax consequences later on. Our community tax experts can help you determine your tax withholding and file it appropriately. Contact a local advisor today.
Medicare Part D
Unlike Social Security taxes, which are based on a wage-based contribution limit, the Medicare tax doesn’t have one. This is because Medicare taxes are a mandatory payroll tax, whereas Social Security taxes are voluntary.
The Medicare tax is withheld from employees’ paychecks to help fund Medicare, the federal health care insurance program for people 65 and older, and some disabled individuals. The program offers hospital, medical, and prescription drug coverage. It is financed by employer and employee payroll taxes and general revenues, including premiums paid by beneficiaries. Part A hospital insurance draws funding from the Hospital Insurance Trust Fund, while Parts B and D draw from the Supplementary Medical Insurance (SMI) Trust Fund.
In addition to the mandatory Medicare tax of 1.45 percent, some employees may be subject to an Additional Medicare Tax of 0.9 percent. The additional Medicare tax applies to wages above $200,000. Employees should save their paycheck stubs with year-to-date Medicare tax deduction amounts to compare them against their W-2 at the end of the year. In addition, employees should be aware that some pre-tax deductions, such as 401(k) contributions, aren’t included in the Medicare tax calculation.
FICA taxes are mandatory employment taxes that must be withheld from paychecks and paid by employers and employees. FICA tax dollars go toward two essential government programs: Social Security and Medicare.
Employees pay a 6.2 percent FICA tax on their wages up to $132,900 each paycheck, and employers contribute 1.45 percent of each employee’s wage. In addition, there is an additional 0.9 percent Medicare surtax for high earners.
FICA withholding amounts are based on employees’ filing status and other information on their W-4 forms. This helps ensure employees pay the correct taxes based on their unique circumstances.
While it is essential to understand how payroll taxes affect your take-home pay, planning ahead for taxes in general is equally important. Speak with a qualified financial advisor today to better understand your tax situation. You may be surprised at how much you can save with some help from the pros. Contact your nearest Northwestern Mutual office to learn more.