What does it mean to withhold federal income tax

Withholding is the amount of income tax your employer pays on your behalf from your paycheck. The changes to the tax law could affect your withholding. 

How to Check Your Withholding

Use the IRS Withholding Estimator to estimate your income tax and compare it with your current withholding. You’ll need your most recent pay stubs and income tax return.

The results from the calculator can help you figure out if you need to fill out a new Form W-4 for your employer. Or the results may point out that you need to make an estimated tax payment to the IRS before the end of the year. 

If you adjusted your withholding part way through 2022, the IRS recommends that you check your withholding amounts again. Do so in early 2023, before filing your federal tax return, to ensure the correct amount is being withheld.

Find Your Adjusted Gross Income (AGI)

If you're changing your tax withholding, you'll need to know your adjusted gross income (AGI). You can find your AGI number on your prior year’s tax return. If you don’t have a copy of last year’s tax return, you can get it from a tax return transcript.

As you prepare your taxes and review your W-2 and pay stubs, you've likely seen the terms "FICA" and "withholding." But do you know what they mean and how they affect your annual taxes?

What is FICA?

FICA stands for the Federal Insurance Contributions Act. It's the federal law that requires employers to pay and withhold certain taxes from the wages they pay employees.

FICA mandates that three separate taxes be withheld from an employee's gross earnings:

• 6.2% Social Security tax, withheld from the first $147,000 an employee makes in 2022.
• 1.45% Medicare tax, withheld on all of an employee’s wages.
• 0.9% Medicare surtax withheld on single filer employee wages over $200,000 per calendar year (over $250,000 for joint filers).

How does FICA impact you?

Almost all American workers are required to pay into FICA. These taxes contribute to those currently receiving funds from Social Security benefits for

• retirees,
• survivors (surviving spouses or minor children of workers who have died) and
• disabled workers.

FICA taxes also go to Medicare programs that fund older and certain disabled Americans' health care costs. When you're old enough, FICA funds collected from those still in the workforce will pay your benefits.

What is withholding?

A tax withholding is the amount an employer takes out of an employee's wages or paycheck to pay to the government. In addition to the FICA withholdings listed above, other employer tax withholdings often include:

• Federal income taxes
• State income taxes (in most states)
• Local income taxes (in some cities and counties)
• Other taxes such as disability insurance taxes (in some states)

What determines how much my employer sets aside for FICA and other tax withholding?

The amount your employer sets aside for FICA is based on percentages set by the federal government. As for federal, state and local income taxes, the amount your employer withholds will usually depend upon the information you provided when filling out your W-4 Form or a similar state or local form.

• Most likely, you completed your W-4 Form upon starting your job.
• On that form, you listed your marital status, tax credits and deductions, and perhaps other income that can affect the amount of tax you need to have withheld from your paycheck.
• Your employer uses your answers from your W-4 Form to determine how much to withhold.

The more tax deductions and credits you claim, the less money your employer will withhold from your paycheck. So, it's important to make sure you accurately fill out your W-4 Form and that you update your information on that form when needed.

Not sure how much to withhold? Use our W-4 Calculator to help you determine how to boost your refund or your take home pay. You can fill out an updated form and submit it to your employer at any time.

How does your tax bracket impact how much FICA is withheld?

Your tax bracket doesn't necessarily affect how much money you contribute to FICA. However, you'll pay an additional 0.9% of your salary toward Medicare if you earn over

• $200,000 per calendar year (for single filers) or
• $250,000 per calendar year (for joint filers).

This is often called the "Additional Medicare Tax" or "Medicare Surtax."  In 2022, it’s also important to keep in mind that only the first $147,000 of earnings is subject to the Social Security part of the FICA tax.

How does FICA work for those who are self-employed?

Self-employed workers and independent contractors pay both the employer and employee contributions for FICA. This is mandated by the Self-Employment Contributions Act (SECA). You can use Schedule SE (Form 1040) to figure out how much tax is due on your self-employment net earnings.

The total contribution amounts taken from net earnings are:

• 12.4% Social Security tax: This amount is withheld from the first $147,000 an employee makes in 2022.
• 2.9% Medicare tax.
• 0.9% Medicare surtax: For single filers earning more than $200,000 per calendar year or joint filers earning more than $250,000 per calendar year.

Self-employed workers will pay self-employment tax (SECA) based on the net income from their business, which is calculated using form Schedule SE. The Social Security Administration uses your historical Social Security earnings record to determine your benefits under the social security program.

Who doesn't have to pay into FICA taxes?

Just about everyone contributes to FICA and withholdings. The major exemptions from FICA include:

• Civilian federal government employees hired before 1984.
• Around 25% of state and local government employees with certain pension plans.
• Some on-campus college student employees.
• Some workers in the country with certain types of non-immigrant visa status.

How does FICA impact your Social Security and Medicare benefits in retirement?

The amount of money you'll receive in monthly Social Security benefits when you retire is based on a formula that looks at the average you earned during the 35 years in which you earned the most money. You can use the Social Security Administration's calculator to estimate your benefits.

• Several things will affect your benefits like how much your spouse earned, if your spouse has passed away, and if you got divorced.
• The money you contribute to FICA won't directly impact how much you receive in Social Security benefits nor how much you'll pay for Medicare coverage.

FICA and withholding taxes are important to understand so you know where your money is going. Although the amount you contribute to FICA is determined by the government, you do have some control over other withholdings based on your W-4 Form answers. You can also keep your hard-earned money in your pocket by making sure you don't miss any tax deductions.

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