Overview: Federal Payroll Taxes
Jeffrey Mo avatar
Written by Jeffrey Mo
Updated over a week ago

Federal Insurance Contributions Act (FICA)

What is the Federal Insurance Contributions Act (FICA)?

As an employer, you have federal payroll tax responsibilities that include withholding taxes from your employees’ wages and paying an employer’s contribution to Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA).

The Federal Insurance Contributions Act (FICA) is the federal law requiring employers to withhold Social Security and Medicare taxes from their employees’ wages. In addition to withholding these taxes from their employees’ wages, employers must also match their employee’s withholdings with an employer portion for the Social Security tax and Medicare tax.

Each paycheck, employers are required to withhold the following three taxes from their employees’ wages: Social Security, Medicare, and an additional 0.9 percent Medicare surtax for employees earning over $200,000.

FICA taxes fund the two federal programs that provide benefits for retired workers and the disabled – Social Security and Medicare. These two federal programs were introduced to provide Americans with savings for the end of their work careers, to provide for Americans with a disabling injury unable to earn an income, to provide for Americans unable to ever work during their lives, and to provide medical care for the elderly. Prior to Social Security being introduced in the 1930s, and Medicare in the 1960s, the federal government had no mandated programs to help provide for these Americans.

Of the FICA taxes, only Social Security tax has a wage base limit. Once an employee earns the equivalent of the specified wage base limit in one calendar year, they no longer have to pay social security taxes on additional wages they earn for that year. This is why sometimes you may see $0 taken for this particular tax.

It should also be noted that while employers are required to match the base Social Security tax and Medicare tax, they are not required to match the additional 0.9% Medicare tax withheld from employees earning over $200,000. 

Federal Income Tax

What is the Federal Income Tax?

Federal Income Tax (or as it's sometimes referred to as Federal Withholding) is a tax levied by the federal government that withholds a portion of the earnings that make up a taxpayer’s taxable income, including employment earnings like regular pay, bonuses, commissions, etc.

A taxpayer's Federal Income Tax is calculated based on:

  • The amount they earn

  • Their marital status

  • The number of withholding allowances they claim

  • Any additional amount they wish to withhold

At the start of hire, every employee is required to complete a Form W-4 (Employee’s Withholding Allowance Certificate) in order to provide their employer with the necessary information to calculate the Federal Income Tax to be deducted from their pay. If an employee elects to not fill out the W-4, the employer has the right to withhold at either the Single with 0 allowances or Married with 1 allowance level.

Federal Unemployment Tax

What is Federal Unemployment Tax?

The Federal Unemployment Tax Act (FUTA) was enacted to help states fund their unemployment compensation programs. All employers must pay and report FUTA tax. This is an employer-paid tax; no withholding from employees is permitted.

Employers can take a credit amount of the total FUTA tax if they make all the payments due to each state where they have taxable employment. In order to obtain full credit:

  • Employers must make timely payments to their state funds by the due date for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.

  • The employer’s home state must not be in arrears for any loan repayments from federal FUTA funds.

Employers can deposit based on the full credit FUTA rate for the year until they are notified of any credit reductions.

Keep in mind that certain states had to borrow funds from the federal unemployment insurance fund over the last 10 years in order to keep up their states’ ability to pay unemployment compensation. Those loans required repayment. If loans were not repaid in time, a credit reduction was applied to employers in that state.

In this article, we have covered the three federal payroll tax obligations employees and employers are required to pay: FICA, Federal Income Tax, and Federal Unemployment Tax.
Fingercheck cannot advise on questions involving the specific rates and numbers at which these taxes are levied. If you have further question, please contact an accountant or other payroll professional.

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