The Federal Insurance Contributions Act (FICA) mandates that employers have to withhold, and also match, certain taxes. FICA consists of Social Security (formally known as the Old-Age, Survivors and Disability Insurance, or OASDI) and the Medicare taxes. The current tax rate for the Social Security tax is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for the Medicare tax is 1.45% for the employer and 1.45% for the employee, or 2.9% total. There’s no wage base limit or maximum wage subject to taxation for the year for the Medicare tax; all covered wages are subject to it. Only the Social Security tax has a wage base limit: $142,800. This limit usually rises from year to year.
Employers submit Form 941, the Employer’s Quarterly Federal Tax Return, to report both the employee’s and employer’s portion of Social Security and Medicare taxes. While Form 941 is a quarterly tax form, you’ll actually make FICA tax payments monthly or every two weeks, depending on how much FICA tax you paid in the previous year. The deposit schedule is not based on how often you pay your employees.
The Additional Medicare Tax
Employers may forget about or often misunderstand this special provision: In 2013, the IRS issued final regulations implementing the Additional Medicare Tax added by the Affordable Care Act. The Additional Medicare Tax of 0.9% applies to an individual’s Medicare wage base exceeding $200,000 for single filers or $250,000 for married taxpayers filing jointly.
Employers begin withholding the Additional Medicare Tax in the pay period when employee wages exceed $200,000, and continue to withhold it in each pay period until the end of the calendar year. There’s no employer match for the Additional Medicare Tax. If an employee files a joint return and doesn’t meet the $250,000 threshold for joint filers, you must still withhold the Additional Medicare Tax on wages you pay over $200,000 in a calendar year. However, these employees can claim credit for any withheld Additional Medicare Tax against the total tax liability shown on their individual income tax returns.
That said, you also may have employees who anticipate owing an Additional Medicare Tax payment even though you pay them less than $200,000, because they have a second job that puts them over the top. In that case, they should make estimated tax payments or request additional income tax withholding using Form W-4.
In any event, you are responsible for withholding Additional Medicare Tax. An employer who doesn’t meet the withholding, deposit, reporting and payment responsibilities may be subject to applicable penalties.
This is just a summary of what can be a complex series of provisions. To make sure you’re on track with the withholding and remitting rules, work with a qualified financial professional.