What is the FICA, Payroll and Withholding Tax?

FICA, payroll and withholding tax are most important part of tax.  FICA stands for Federal Insurance Contributions Act. The FICA tax includes a 6.2% Social Security tax and 1.45% Medicare tax on earnings. In 2020, …


FICA, payroll and withholding tax are most important part of tax.  FICA stands for Federal Insurance Contributions Act. The FICA tax includes a 6.2% Social Security tax and 1.45% Medicare tax on earnings. In 2020, only the first $137,700 of earnings was subject to Social Security tax ($142,800 in 2021). A 0.9% Medicare tax may apply to earnings over $200,000 for individual filers / $250,000 for joint filers. It is very important for taxpayers to understand about FICA, Payroll and withholding tax.

What is payroll tax? Are FICA Tax and Payroll Tax the Same?

FICA is often referred to as payroll tax because employers typically deduct FICA tax from employees’ paychecks and remit the money to the IRS on behalf of the employee.

What is withholding tax? How does a tax withholding work?

A withholding tax is income tax that a payer (usually an employer) remits on behalf of a payee (usually an employee). The payer deducts or withholds the tax from the payee’s income.

Here’s a breakdown of the taxes that could come out of your paycheck.

  • Social security tax:2%. Often labeled Old-Age, Survivors, and Disability Insurance(OASDI), this tax is generally withheld on the first $137,700 of your salary in 2020 ($142,800 in 2021). Paying this tax is how you get credits for Social Security benefits later.
  • Medicare tax:45%. Sometimes called the “hospital insurance tax,” it pays for health insurance for people age 65 and older, younger people with disabilities, and people with certain medical conditions. Employers typically have to withhold an additional 0.9% on money you earn over $200,000.
  • Federal taxes: This is income tax that your employer withholds from your paycheck and submits to the IRS on your behalf. The amount largely depends on what you put on your W-4.
  • State Tax: This is state income tax withheld from your pay and sent to the state by your employer on your behalf. The amount depends on where you work, where you live, and other factors, like your W-4 (and some states don’t have an income tax).
  • Local income or salary tax: Your city or county may also have an income tax. This money could be used for expenses such as the bus system or emergency services.


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How FICA Tax or Withholding Tax Is Calculated

The amount of tax your employer withholds from your paycheck largely depends on what you put on your Form W-4, which you probably filled out when you started your job. Here are some things you should know:

  • Form W-4 asks about your marital status, dependents, and other factors to help you figure out how much to withhold. The less you withhold, the less tax comes out of your paycheck.
  • What you put on your W-4 is then funneled through something called withholding tables, which your employer’s payroll department uses to calculate exactly how much federal and state income tax to withhold.
  • You can change your W-4 at any time. Simply download a blank one from the IRS website, fill it out, and give it to your HR or payroll team.

Other Payroll Tax Items You May Hear About

    • FUTA Tax: Stands for Federal Unemployment Tax Act. The tax funds a federal program that provides unemployment benefits to people who lose their jobs. Employees do not pay this tax or have it withheld from their pay. Employers pay for it.
    • SUTA Tax: Same general idea as FUTA, but the money funds a state program. Employers pay the tax.
  • Self-employment tax: If you’re self-employed, you may also have to pay self-employment tax, which is essentially the entire burden of Social Security and Medicare taxes. That is on the grounds that the IRS forces a 12.4% Social Security charge and 2.9% Medicare charge on net profit. Regularly, workers and their bosses split that bill, so representatives have 6.2% and 1.45%, separately, kept from their checks. The independently employed, in any case, pay for everything. (For 2020, just the first $137,700 of profit is dependent upon the Social Security segment.) At 0. An extra 9% Medicare expense may likewise apply assuming that your net income from independent work surpasses $200,000 assuming you are a solitary filer or $250,000 on the off chance that you record a joint return. Since you may not get a customary check, you might have to document quarterly assessed charges as opposed to hold back.


Why do I have to pay FICA tax?

Bosses need to keep charges from workers’ checks since charges are a pay-more only as costs plan in the United States. Whenever you bring in cash, the IRS needs its cut as quickly as time permits. Some people are “exempt workers,” meaning they choose not to have federal income tax withheld from their paychecks. Social Security and Medicare taxes will still come out of your checks, though.

You are generally exempt from withholding only if two things are true:

  • received a refund of all your federal income taxes withheld last year because you had no tax liability.
  • You expect the same thing to happen this year.

Is it better to withhold taxes?

Remember, one of the main reasons you file a tax return is to calculate income tax on all of your taxable income for the year and see how much of that tax you’ve already paid through withholding tax. If it turns out you overpaid, you’ll probably get a tax refund. It turns out that you paid less, you will have to pay a tax bill. If you ended up with a huge tax bill this year. Don’t want another one, you can use Form W-4 to increase your tax withholding. That will help you owe less (or none) next year.

If you got a huge tax refund, consider using Form W-4 to reduce your tax withholding. You’re giving the government a free loan, and worse. You could be unnecessarily living on less than your paycheck for the entire year. It may feel good to get a tax refund from the IRS, but think about what life might have been like last year if you had that extra money when you needed it for groceries, overdue bills, fixing the car, paying off a credit card, or investing. It is very important for taxpayers to understand about FICA, Payroll and withholding tax.


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