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Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

How do I figure FICA taxes?

Dear Dollar Diva,
My tax preparation program says that too much Social Security and Medicare tax was withheld from my paychecks and I should get refunds from my employers. I had two employers in 2000.

How do I figure out Social Security income, Medicare income, Social Security tax and Medicare tax? What do I do if too much was withheld?

If you had more than one employer in 2000 and your total Social Security wages were more than $76,200, you paid too much Social Security tax. It's a quirk in the tax system that the Diva explains below.

Two components of FICA taxes
FICA taxes eat up 7.65% of the average taxpayer's wages. There are two components to FICA taxes:

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  1. Social Security or Old-Age, Survivors, and Disability Insurance (OASDI): The tax rate is 6.2 percent on Social Security wages up to $76,200.
  2. Medicare (hospital insurance): The tax rate is 1.45 percent on all Medicare wages.

If you made big bucks in 2000, you get a break on the Social Security portion; you only pay 6.2 percent on your first $76,200. But there's no break on the Medicare portion. All of your Medicare income gets hit with the 1.45 percent tax; even if it's a million dollars.

The 7.65 percent rate has been around for a long time, but the Social Security wage base changes every year. It went up from $76,200 to $80,400 in 2001.

What's the difference between Wages, Social Security wages and Medicare wages?

Your wages are broken down into three categories on the W-2 (Wage and Tax statement) your employer gives you at tax time. Here's what they are and how they show up on the W-2:

Where it's reported on the W-2
What it includes and excludes
Box 1

Wages, tips and other compensation that you have to pay federal income tax on. It includes taxable fringe benefits, such as a car allowance.

It excludes amounts that you don't have to pay federal income tax on, such as the contributions you made to your 401(k) plan. When that happens, the amount in this box will be less than the amounts in Box 3 and Box 5.

Social Security wages
Box 3

This amount is usually the amount reported in Box 1, plus compensation that you don't have to pay income tax on, but do have to pay Social Security tax on, such as contributions to your 401(k) plan.

The maximum amount that should appear in this box for 2000 is $76,200. Earnings in excess of $76,200 are not subject to Social Security tax.

Medicare wages
Box 5

This amount is the amount reported in Box 1, plus compensation that you don't have to pay income tax on, but do have to pay Medicare tax on, such as contributions to your 401(k) plan.

If you earned less than $76,200, this amount should be the same as the amount in Box 3. If you earned more, it will be higher.

For more details on what's included and excluded in the various categories, read the Instructions for Forms W-2 and W-3.

How are the FICA taxes computed for 2000?
Social Security: This portion of your FICA taxes is 6.2 percent of your Social Security wages, up to the wage base of $76,200. If you paid more than a total of $4,724.40 ($76,200 x 6.2 percent) for the year, you are entitled to a refund.

Each employer is required to withhold 6.2 percent on wages up to $76,200. He cannot adjust the wage base or withholding because you have more than one job. This is the quirk in the tax system the Diva mentioned earlier, and the IRS fixes it when you file your tax return by giving you a refund for the extra Social Security tax that you paid because you had more than one employer. Just report the excess on line 61 of your 2000 Form 1040.

Every once in a while an employer screws up on the math computation and withholds too much. If that happens, your refund has to come from the employer, not the IRS. The IRS only gives refunds for the quirk.

Medicare: This portion of your FICA taxes is 1.45 percent of all the Medicare income you earned, even if you made a million dollars. Excess withholding of the Medicare tax would only happen if your employer screwed up the math computation. If that happened, you would go to the employer, not the IRS, for the refund.

Check your paycheck
If your employer withholds too much in FICA taxes, it's a lot easier to get a refund from him if you catch the mistake as soon as it happens.

You need to own all of the numbers you see on your pay stub. If you don't understand how a number was computed, waltz over to your payroll department, and have someone explain it to you.

Check every paycheck for accuracy. Your employer's payroll department is supposed to do that, but sometimes when folks get busy and it's not their money, they look with one eye.

-- Posted: March 29, 2001

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See Also
A tax tip to help you maximize medical deductions
Adjust withholding so you don't get a big refund every year
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