FICA is the acronym for Federal Insurance Contributions Act. It generally requires employers to withhold Social Security and Medicare taxes from their employees’ wages (wages, salaries, commissions, bonuses, etc.) and to match the amounts withheld. In other words, employers must remit two times the required withholdings for Social Security and Medicare taxes.

In the year 2007, the employer must withhold Social Security taxes of 6.2% of each employee’s first $97,500 of wages. The employer then matches that amount. This means the employer must remit 12.4% of each employee’s wages that are not in excess of $97,500 in the year 2007. The result is a maximum withholding from an employee in 2007 of $6,045; a maximum matching by the employer of $6,045; and a maximum remittance to the federal government of $12,090.

The second part of the FICA tax is the Medicare tax. The Medicare tax of 1.45% must be withheld from every dollar of each employee’s wages and the employer must also match that amount. In other words, the employer must remit 2.9% of all wages during 2007 as the Medicare portion of FICA.

The employers’ cost of matching the FICA taxes (the matching amounts for the Social Security tax and the matching amounts for the Medicare tax) are recorded by the employer as an additional expense or manufacturing cost.

You can learn more about FICA by visiting www.AccountingCoach.com. Select Payroll Accounting under the following tabs: Topics Explained, Drills/Exams, and Crosswords. You can also find the rules in the Internal Revenue Service Publication 15 (Circular E) Employer’s Tax Guide at its website www.irs.gov/pub/irs-pdf/p15.pdf.

Learn more about Payroll Accounting.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years. He is the creator and author of all the content found on AccountingCoach.com. You can read 1,500 testimonials praising his ability to explain accounting in a way that anybody can understand.

Learn more about AccountingCoach Pro