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| Taxes | Finance & Capital Markets | Khan Academy

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Finance & Capital Markets | Khan Academy

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FICA tax | American civics | US History | Khan Academy

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How the FICA tax is calculated and what it stands for. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/humanities/us-history/american-civics-parent/american-civics/v/medicare-sustainability?utm_source=YT&utm_medium=Desc&utm_campaign=UShistory Missed the previous lesson? https://www.khanacademy.org/humanities/us-history/american-civics-parent/american-civics/v/social-security-intro?utm_source=YT&utm_medium=Desc&utm_campaign=UShistory US history on Khan Academy: From a mosquito-ridden backwater to the world's last remaining superpower, the United States of America is a nation with a rich history and a noble goal: government of the people, by the people, for the people.

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FICA tax | American civics | US History | Khan Academy

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How the FICA tax is calculated and what it stands for. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/humanities/us-history/american-civics-parent/american-civics/v/medicare-sustainability?utm_source=YT&utm_medium=Desc&utm_campaign=UShistory Missed the previous lesson? https://www.khanacademy.org/humanities/us-history/american-civics-parent/american-civics/v/social-security-intro?utm_source=YT&utm_medium=Desc&utm_campaign=UShistory US history on Khan Academy: From a mosquito-ridden backwater to the world's last remaining superpower, the United States of America is a nation with a rich history and a noble goal: government of the people, by the people, for the people.

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Basic Info from About.com

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Employers report payroll by calculating gross monthly wage earnings and various payroll deductions to arrive at net pay. Although this seems simple enough on the surface, calculating various payroll deductions requires that you be detail-oriented and work with extreme accuracy.

Basic Formula for Net Pay:

Employee's gross pay (pay rate x hours worked)
minus Statutory payroll tax deductions
minus Voluntary payroll deductions
equals Net Pay.

Statutory Payroll Tax Deductions

The law requires that payroll taxes must be withheld from an employee's paycheck. Employers must then transmit these withholdings to various tax agencies. Payroll tax deductions include the following:

Federal income tax withholding (based on withholding tables in Publication 15)

Social Security tax withholding (6.2 percent up to the annual maximum taxable earnings of $127,200 as of 2017)

Medicare tax withholding (1.45 percent)

Additional Medicare tax withholding (0.9 percent) for employees earning over $200,000 (this is a new tax withholding requirement starting in the year 2013)

State income tax withholding

Various local tax withholdings (such as city, county or school district taxes, state disability or unemployment insurance).

Voluntary Payroll Deductions

Voluntary payroll deductions are withheld from an employee's paycheck only if the employee has agreed to the deduction.

Voluntary deductions pay for or contribute toward various benefits which the employee has elected to participate in. Voluntary payroll deductions may include the following:

Health insurance premiums (medical, dental, and eye care)

Life insurance premiums

Retirement plan contributions (such as a 401(k) plan)

Employee stock purchase plans (ESPP and ESOP plans)

Meals, uniforms, union dues and other job-related expenses

Voluntary deductions can be paid with pre-tax dollars or after-tax dollars, depending on the type of benefit that's being paid for. Some pre-tax deductions reduce wages subject to federal income tax, while other deductions reduce wages subject to Social Security and Medicare taxes as well. IRS Publications 15 and 15-B explain which benefits are pre-tax for various purposes, and professional grade payroll software will help you keep track of all tax-related payroll calculations.

Employer Payroll Tax Responsibilities

The responsibility for payroll taxes continues even after paychecks have been issued to employees. The company is responsible for:

1. Paying the employer's share of payroll taxes

2. For depositing tax dollars withheld from the employees' paychecks

3. Preparing various reconciliation reports

4. Accounting for the payroll expense through their financial reporting

5. And filing payroll tax returns

Employer Payroll Taxes

Companies are responsible for paying their portion of payroll taxes as well. These payroll taxes are an added expense over and above the expense of an employee's gross pay. The employer portion of payroll taxes includes the following:

Social Security taxes (6.2 percent up to the annual maximum)

Medicare taxes (1.45 percent of wages)

Federal unemployment taxes (FUTA)

State unemployment taxes (SUTA)

FICA Taxes

FICA stands for the Federal Insurance Contributions Act. The FICA tax consists of both Social Security and Medicare taxes. Social Security and Medicare taxes are paid both by the employee and the employer. Each party pays half of these taxes. Together, both halves of the FICA taxes add up to 15.3 percent, broken down as follows:

Social Security (employee pays 6.2%)

Social Security (employer pays 6.2%)

Medicare (employee pays 1.45%)

Medicare (employer pays 1.45%)

As of 2013, an Additional Medicare tax is applied to employees who file taxes as head of household, single or as a qualifying widow(er) with a dependent child and whose Medicare wages exceed $200,000.

The threshold is much lower for married individuals who file separate tax returns: $125,000. The Additional Medicare tax applies to income over $250,000 for married taxpayers who file joint returns.

This is an employee-only tax. There's no corresponding tax imposed on the employer.

The employee portion of Social Security has increased from the 4.2 percent it was set at in 2011 and 2012. That payroll tax holiday was legislated as part of the Tax Relief Act of 2010, which was then extended by HR 3765 and extended again by HR 3630. But the employee portion of Social Security reverted back to the full 6.2 percent in 2013.

Reporting Payroll Taxes

Employers are required to report their payroll tax obligations and to deposit payroll taxes in a timely manner. Reporting requirements include:

Making federal tax deposits

Annual federal unemployment tax return (Form 940 or 940EZ)

Employer's quarterly payroll tax return (Form 941)

Annual Return of Withheld Federal Income Tax (Form 945)

Wage and Tax Statements (Form W-2)

Employers also have requirements to file reports with various state and local agencies. Employers can find links to state tax agencies through the American Payroll Association website.
Originally written by Diana Van Blaricom, a certified Professional in Human Resources (PHR). Edited and revised by Beverly Bird.

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Learn About Payroll Taxes and How to Calculate and Report Deductions

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Employers report payroll by calculating gross monthly wage earnings and various payroll deductions to arrive at net pay. Although this seems simple enough on the surface, calculating various payroll deductions requires that you be detail-oriented and work with extreme accuracy.

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Great summary!

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However you make your money -- by working or by investing -- you can pretty much count on owing taxes to the federal government. In most places you will also owe taxes to your state government, too.

For now, though, let's just consider your federal tax bite on common forms of income.

Income taxes: Your "earned" income -- that which you make by working -- will be taxed on a graduated scale.

There are 7 income tax rates: 10%, 15%, 25%, 28%, 33%, 36% and 39.6%.

The first dollar you make will be taxed at the 10% rate while the last dollar you make likely will be taxed at a higher rate. The more you make, the higher your top rate will be.

For example, in 2015, if your taxable income is $65,000 and you're single, you'll be in the 25% bracket. You'll owe 10% on the first $9,225 of your income, 15% on the next $28,225 and 25% on the rest.

Remember, your taxable income is not your gross income. It generally reflects your gross income minus any deductions, credits and exemptions you may claim.

So if you gross $100,000, your taxable income might be closer to $80,000.

Social Security and Medicare taxes: Payroll taxes -- or FICA taxes as they're also called -- are intended to fund the two biggest U.S. safety net programs.

You will owe 12.4% in Social Security tax on the first $118,500 of your earned income. (That income threshold is for 2015; it's adjusted for inflation every year.)

If you're an employee, you'll pay 6.2% of that and your employer will pay the other 6.2%.

If you're self-employed, you'll pay the full 12.4% but may deduct half of it on your tax return as a business expense.

You'll owe another 2.9% in Medicare taxes on all of your earned income. Again, if you're employed, you'll pay half (1.45%) while your employer will pay the other half.

If you're a very high income earner, you'll owe an additional 0.9% on the amount over $200,000 ($250,000 if married). So you'd end up paying 1.45% on the first $200,000 and 2.35% on the rest.

The 0.9% Medicare surtax is a recent change and is intended to help pay for health reform.

Investment income taxes: Capital gains, dividends and interest represent "unearned income."

Generally speaking, interest -- say from a savings account -- is taxed at regular income tax rates.

But you'll pay a lower rate for capital gains and dividends on investments you've held at least a year. How much lower depends on your overall income.

For most people, the long-term capital gains and dividend tax rate is 15%.

But it goes up to 20% for households making more than $200,000.

Those same high-income households may also have to pay a 3.8% Medicare surtax on some of their capital gains and dividends, another measure intended to help pay for health reform.

Income from investment properties (e.g., a vacation rental you own) is also subject to ordinary income tax.

CNNMoney (New York) First published May 28, 2015: 4:19 PM ET

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For now, though, let's just consider your federal tax bite on common forms of income. Income taxes: Your "earned" income -- that which you make by working -- will be taxed on a graduated scale. There are 7 income tax rates: 10%, 15%, 25%, 28%, 33%, 36% and 39.6%.