Social Security and Medicare (FICA) Taxes
The Federal Insurance Contributions Act (FICA) is a federal law that requires you to withhold two separate taxes from the wages you pay your employees: a social security tax and a Medicare tax. The law also requires you to pay the employer’s portion of these taxes. Unless you have employees who receive tips, the employer’s portion will be the same as the amount that you’re required to withhold from your employees’ wages.
Each of the FICA taxes is imposed at a single flat rate. Currently, the social security tax rate for employees is 6.2 percent and the Medicare tax rate is 1.45 percent. The taxes are unaffected by the number of withholding exemptions an employee may have claimed for income tax withholding purposes. You simply multiply an employee’s gross wage payment by the applicable tax rate to determine how much you must withhold and how much you must pay.
Let’s assume you have one employee, to whom you pay gross wages of $500 every two weeks. You must withhold from each paycheck $31.00 in social security taxes ($500 x 6.2%) and $7.25 in Medicare taxes ($500 x. 1.45%). You will also owe equal amounts ($31.00 in social security and $7.25 in Medicare) as the employer’s portion of the taxes. In other words, each $500 wage payment will create a combined FICA tax liability of $76.50.
The social security tax is subject to a dollar limit, which is adjusted annually for inflation. For 2010, your obligation to withhold and to pay the social security tax for an employee ends once you’ve paid that employee total wages of $106,800.
However, there is no ceiling on the Medicare tax. You must continue to withhold and to pay the Medicare tax regardless of how much you pay an employee.
For 2010 only, you may be exempt from the employer’s 6.2 percent portion of the social security tax with respect to any employee hired after February 3, 2010 if that new employee was unemployed (or was not employed for more than 40 hours) during the 60-day period leading up to the date you hire him or her. This exemption is provided by the provisions of the HIRE Act enacted by Congress on March 17, 2010. Check the IRS website for information on this special tax exemption.
If you have more questions feel free to contact me.
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