What You Need to Know About Taxes and Deductions
What is FICA?
If you have ever received a paycheck, then you’re going to notice that the money you earned is not the same as the money that you receive. This is the difference between gross and net. Gross is the money you earned before deductions whereas net is what remains after your taxes have been taken out.
This is where FICA comes in. FICA stands for Federal Insurance Contributions Act. It is an umbrella term that covers Social Security and Medicare.
Why Do I Pay Social Security and Medicare?
People are quick to question why they pay these when they are not using either. Social Security and Medicare are referred to as payroll taxes. Though we will go over both, it is important to note that as an employee you are not the only person who pays into these. Your employer is required to match the FICA taxes paid by each employee.
Social Security Explained
Social Security is given to retired workers, disabled workers, and the dependents thereof. The money paid out was never meant to be a person’s sole income. Think of it as a way to supplement your other retirement funds.
According to the Social Security Administration (SSA), as of June 2019, 64 million people received Social Security benefits. Of that, 48 million were retirees.
Someone who is 62 is eligible to collect Social Security Benefits, but the SSA designates what your retirement age is based on the year you were born. You may find this chart here. Currently, for someone born after the year 1960, the full retirement age is 67. The longer you wait, the more you will collect. The total is a percentage of your average income over the course of your career. The more you earn, the more you pay into it, the more you get out of it.
What is Medicare?
Medicare is a federal health insurance program made available to people who are 65 years old. And like Social Security, Medicare is aimed at primarily helping older people, but it can be collected by those who are younger and have certain disabilities.
There are different parts to Medicare: Part A pertains to Hospital Insurance, Part B is for Medical insurance (outpatient procedures and examinations), and Part C covers prescription medications. You can find the breakdown of the different aspects of Medicare here.
Federal and State Withholdings
There are two different types of withholdings that you need to be concerned with: federal and state income taxes.
Our current system for paying federal taxes is based on a system established in the 1940s. Money was needed to fund costs associated with fighting World War II and this was how they were collected. During that time, taxes were collected in one annual payment whereas now they are taken out with each check given. Now, after we file our annual taxes, we receive a refund if more money was withheld than owed.
In a similar fashion, states may have their own rates for taxing wages. As of 2020, seven states, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no income taxes. New Hampshire and Tennessee do not tax wages. What’s the difference? Think of wage as a fixed rate and think income as the total of all money earned through various sources like wages, interest, gifts, dividends. Income fluctuates and cannot be a fixed amount like a wage.
How to Calculate Taxes and Withholdings
As an employer, you will need to have each one of your employees fill out a Form W-4 after being hired. This will include their personal information, their marital status, dependents, and claims to be exempt from certain taxes.
Miscalculating taxes and withholdings has real-life financial consequences that could impact both you and your employee. There are certain intangible aspects of managing your own payroll as well. Consider how much time you will spend determining the proper amount of taxes and how much your time is worth? Should you decide to hire someone to do payroll for you, you risk your ability to handle payroll when and if that employee departs from the company.
Paystub generator like 123PayStubs eliminate these problems. After receiving a W-4, enter the employee’s information such as salary, hourly wage, and hours worked. Withholdings from FICA, Social Security, Medicare, and Federal/State taxes will be calculated for you. You won’t need to be current on tax code and law because 123PayStubs will handle that for you.
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