How FICA Tax and Tax Withholding Work in 2021-2022
In this article, you will get to know what the FICA tax is and how tax withholding can work in the year 2021-22. We would also tell you how the taxes would come out of your paycheck and how you can manage or monitor them better.
Taxes such as FICA tax or withholding tax fall into the category of Payroll tax. This is the amount an employer deducts from the pay due to an employee and submits to the IRS and any other state tax authority on behalf of the employee. We will discuss the key factors in this regard and why you need to keep proper track of the same.
Let’s start with the basics then!
What Does the FICA Tax Include?
The FICA tax includes a Medicare tax of 1.45% and a Social Security tax of 6.2% on earnings. For the year 2021, the first $142,800 of earnings only were made subject to the Social Security tax. This amount was increased to $147,000 in 2022. A 0.9% of Medicare tax may apply to earnings made over $200,000 if you are a single filer. For the joint filers, this limit is kept at $250,000.
Is Payroll Tax the same as the FICA Tax?
Payroll tax is often referred to as the FICA tax. This is because employers usually deduct the FICA tax from the paycheck of an employee and remit the amount to the IRS on behalf of the employee.
The full form of FICA is the Federal Insurance Contributions Act.
FICA tax rates and limits for 2021-2022
Social Security Tax (known as OASDI)
6.2% ( in 2021,only on the first $142,800. $147,000 in 2022)
6.2% (in 2021,only the first $142,800 in . $147,000 in 2022)
Additional Medicare Tax
0.9% (For single filers-on earnings over $200, 000. $250,000 for joint filers)
What is withholding Tax? How does it work?
A withholding tax is basically an income tax remitted by a payer (usually an employer) on behalf of a payee (usually an employee). The payer withholds or deducts the taxable amount from the income due to the payee. Here we will discuss how such taxes may be deducted from your paycheck.
- Federal income tax. This is the income tax withheld from your pay by your employer. It needs to be sent to the IRS on your behalf. The amount primarily depends upon what you have declared on your W-4.
- State tax: This is the income tax withheld from your pay by your employer. It needs to be sent to the state tax authority on your behalf. The amount primarily depends upon where you live, where you work and other factors like your W-4 inputs. Please note that some states do not impose this tax.
- Social Security tax: Frequently termed as OASDI (Old-age, Survivors and Disability Insurance) as is levied at the rate of 6.2%.As per the 2021 tax rules, this tax is withheld on the first $142,800 of your income. This amount is increased to $147,000 in the year 2022. Paying this tax on time will impact your credits for Social Security benefits later on.
- Medicare tax: 1.45%. Frequently termed as the “hospital insurance tax” and is levied at the rate of 1.45%. This tax is used to cover health insurance for people aged 65 or more. These benefits are also extended to younger people with disabilities and other people with certain conditions. Employers usually deduct an extra 0.9% on the salary employees earn over $200,000.
- Wage tax or Local income tax: Your city or county may impose an additional income tax. The money from it may go to cover the expenses of certain emergency services.
Together known as the FICA Tax
Social Security Tax (OASDI)
6.2% ( in 2021, on the first $142,800 of earnings only; $147,000 in 2022)
6.2% (in 2021,on the first $142,800 of earnings only ; $147,000 in 2022)
Additional Medicare Tax
0.9% (for single filers, on earnings over $200,000 ; $250,000 for joint filers)
Other Payroll Taxes:
Federal Income Tax
Paid by an employee
State Tax, Local Income or Wage Tax
Based on Location
Based on Location
Federal Unemployment Tax (FUTA)
Paid by an Employer
State Unemployment Tax (SUTA)
Paid by an Employer
How is the FICA Tax or withholding Calculated?
The calculation of the amount of tax your employer withholds is done on the basis of your inputs on Form W-4. You may have filled out this form you started your job. Please note the following points:
- Form W-4 mentions your dependents, marital status and other information to help you determine how much money to withhold. The less amount is withheld, the less tax gets deducted from your paycheck.
- The information on your W-4 gets reflected on withholding tables. The payroll department of your employer uses these tables to calculate the exact income tax to withhold.
- If you think it is necessary, you can change your W-4 details at any time. You simply need to download a blank W-4 form from the IRS website, fill in the details and submit the same to your HR or payroll team.
Other Types of Payroll Tax
- Self-Employment Tax: If you are a self-employed person, this tax applies to you. This tax basically included all of the Medicare and Social Security. The IRS levies Social Security tax at the rate of 12.4% and Medicare tax at the rate of 2.9% on net earnings. Typically, both the employees and their employers share it as 50 % each. However, if you are self-employed, you will need to pay the entire amount. As you may not own a traditional paycheck, you will need to file estimated quarterly taxes, in place of withholdings.
- FUTA Tax: FUTA stands for Federal Unemployment Tax Act. The tax is designed to fund a federal program that gives unemployment benefits to those who lost their jobs. This tax is not deducted or withheld from the paychecks of the employees. Employers need to pay it.
- SUTA Tax: The tax has the same objective as that of FUTA, but the money is collected to fund a state program. Employers need to pay this tax.
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Frequently Asked Questions
Why is there a Need to Pay the FICA Tax?
Employers need to withhold income taxes from the paychecks of their employees as taxes are a pay-as-you-earn type of arrangement in the United States. When you earn an income, the IRS cuts the same as soon as possible.
Can you Get an Exemption from Paying the FICA tax from your Paycheck?
Some taxpayers are exempted from paying the FICA tax. They canchoose not to have the federal income tax withheld from their paychecks. However, Medicare tax and Social Security tax will be deducted from their checks.
Typically, you can claim an exemption if the following are true:
🔹 You received a refund of all your federal income tax that was withheld last year- as there was no tax liability on you.
🔹 You expect the same to happen this year as well.
Is it Good for Me to withhold Taxes?
Usually, we file a tax return to calculate the income tax on our taxable income for the year and check how much of this has been already paid through withholding tax. If you discover that you have paid more, you can claim a tax refund. If you have paid less, you may have to pay a tax bill.
If you have paid a lot on your tax bill this year and do not want a repeat of the same, you can modify your Form W-4 details to increase your tax withholding. This way, you will owe less ( probably nil as well!) next year.
On the other hand, if you have received a huge tax refund, you can modify your Form W-4 details to decrease your tax withholding. This is to avoid getting less on your paychecks the entire year.
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