||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
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
FICA taxes eat up 7.65% of the average
taxpayer's wages. There are two components to FICA taxes:
- 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.
- Medicare (hospital
insurance): The tax rate is 1.45 percent on all Medicare
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
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
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.
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
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.
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