Do you ever wonder where exactly the money that is deducted from your gross pay goes? It can seem like a huge chunk when your gross pay and net pay are $100 or more off. So where is this money that is being taken from your paycheck really going? Read on to understand the basics of FICA, Medicare, and Social Security tax.
FICA Tax
FICA is an acronym for Federal Insurance Contributions Act. This act was introduced in 1930 to cover Social Security. Both you and your employer will pay into this tax. Now, the tax is divided into Medicare and Social Security tax which is why you will probably see these two items on your paystub rather than just FICA. In 2019, the tax rate for employees was 1.45% for Medicare and 6.2% for Social Security. High-income employees are charged an additional 0.9% Medicare surtax.
Employers have the responsibility of withholding FICA taxes from their employees’ wages. In addition, employers must also pay their own employer FICA taxes and report both these and their employees’ portions to the IRS. FICA taxes are the most important tax to stay on top of and get correct. Not withhold or paying the correct amount of FICA taxes will result in serious consequences for the employer. All businesses must report FICA taxes quarterly to the IRS using Form 941.
Medicare Tax
The Medicare program ensures all Americans 65 years and older have access to federal health insurance. The Medicare tax that you see on your paystub is what supports this program. Both employees and employers must pay Medicare tax. If you are self-employed, you will pay self-employment tax, which is the equivalent of both employee and employer portions of the Medicare Tax.
In 2019, the rate of Medicare tax was 1.45% of an employee’s gross earnings. The employer’s rate matches that rate. If you make more than the threshold set by the IRS, you will have to pay an additional Medicare tax of 0.9%.
Social Security Tax
Social Security tax, like Medicare tax, is designed to help support the millions of retired Americans. This tax pays for federal disability and retirement benefits. Both employers and employees must pay Social Security Tax. As with Medicare tax, self-employed individuals will have to pay both the employee and employer portion of Social Security Tax.
The rate for Social Security tax in 2019 was 6.2% of an employee’s gross wages below $132,900. The employer must match the amount paid by the employee. If an employee makes more than the set $132,900, Social Security tax should not be withheld from their pay for any earning made above this amount.
If you do not follow Social Security, Medicare, or FICA instruction carefully, you may end up either not deducting enough or too much. This is especially true if you continue to deduct taxes from earning made over the set threshold. In this case, the money will have to be refunded to your employees. This is easily avoidable if you have a streamlined process for your taxes and payroll systems. Check out our pay stub generator to help you with your taxes. Our pay stub generator accurately calculates and deducts taxes based on the information you provided and the state in which you live. Try it now and see for yourself.
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