Definition: The tax you withhold from your employees' paychecks to cover the
cost of Medicare expenses
If you're preparing your employees' paychecks yourself, you need
to be aware of the deductions you must make as set forth by the
federal government. You must withhold Social Security and Medicare
taxes--these are known as FICA (Federal Insurance Contributions
Act) taxes. The FICA tax actually consists of two taxes: a 6.2
percent Social Security tax and a 1.45 percent Medicare tax. To
calculate the tax you need to withhold for each employee, multiply
an employee's gross wages for a pay period by the tax rates. In
addition, as an employer, you are required to pay a matching amount
of FICA taxes on each of your employees.
Here's how it works: If an employee has gross wages of $1,000
every two weeks, you must withhold $62 ($1,000 x 0.062) in Social
Security taxes and $14.50 ($1,000 x .0145) in Medicare taxes, or
$76.50. As an employer, you owe a matching amount as well, so the
total amount in FICA taxes to be paid is $153. The maximum amount
of wages currently subject to Social Security tax is $87,000. There
is no limit on the amount of wages subject to the Medicare tax.
The IRS requires any business paying more than $200,000 annually
in payroll taxes or other federal taxes to pay them through the
Electronic Federal Tax Payment System (EFTPS). If you pay less than
that amount, you can still deliver a check for payroll taxes owed
with your deposit coupons to their bank (the same bank as the check
is drawn on). The form to use is 8109 (Federal Tax Deposit Coupon).
On each coupon show the deposit amount, the type of tax, the period
for which you are making a deposit and your phone number. You
typically pay these taxes monthly, depending on the size of your
business. Approximately five to six weeks after you receive your
EIN, the IRS will send you the coupon book.
In addition to making your monthly payroll deposits, you are
required to file Form 941 (Employer's Quarterly Federal Tax
Return). This is a form that provides the government with
information on the federal income taxes you withheld from your
employees' pay as well as the FICA taxes you withheld and paid. It
also tells the government when the taxes were withheld so the IRS
can determine if the federal tax deposit was made on time.