6.4 Employee FIT, FICA Withholding & When Wages Are Taxable

Two withholdings, two rulebooks

AIPB clusters withholding and depositing with when wages are taxable because the bookkeeper must know which dollars enter each tax and when those dollars are treated as paid. FIT uses the employee's Form W-4 and the computational procedures in Publication 15-T. FICA—old-age, survivors, and disability insurance (OASDI, Social Security) plus hospital insurance (Medicare)—uses statutory rates and a wage base that the Social Security Administration and IRS Topic 751 publish each year. Deposits, Forms 941/940, and the employer match belong in Chapter 7; this section is the employee side and the taxable wage definition.

This independent OpenExamPrep section cites IRS Topic 751 (page reviewed or updated 20-Jan-2026), SSA's contribution and benefit base page, and Publication 15 (2026). It does not reprint 2026 annual FIT bracket tables. If a stem asks for FIT on a regular paycheck, the correct method is W-4 + Pub. 15-T (or the software that implements them), not a memorized percentage from a blog.

FIT withholding is an estimate, not a tax return

Publication 15 tells employers to withhold federal income tax from each wage payment according to Form W-4 and the correct withholding table or computational procedure in Pub. 15-T. Employees who owed tax or received a large refund on their 2025 return should consider a new 2026 Form W-4. Completing only Steps 1 and 5 withholds as if that filing status's standard deduction and rates apply with no other adjustments. Step 2 raises withholding for multiple jobs. Step 3 lowers it for credits. Step 4(a) treats other income as if it needed withholding from this job; Step 4(b) accounts for extra deductions; Step 4(c) is a flat extra amount.

Supplemental wages—Publication 15 lists bonuses, commissions, overtime pay (employers may instead treat overtime as regular wages), accumulated sick leave, severance, awards, prizes, back pay, reported tips, retroactive increases, taxable fringe benefits, and nonaccountable expense allowances—use either the aggregate method (add to regular wages and withhold on the total using the W-4) or, when the supplemental amount is separately identified and regular withholding has been done on the regular wages, the optional flat rate. Publication 15 (2026) states that the withholding rate on supplemental wages remains 22% (and 37% on supplemental wages over $1 million in the calendar year). The 37% rate on the excess over $1 million applies without regard to Form W-4.

Illustrative FIT, not a bracket table. Harbor Street pays Priya a separately identified $1,500 year-end bonus after already withholding FIT on her regular wages for the period. If the firm uses the optional 22% supplemental method in Publication 15 (2026), FIT withheld on the bonus is 0.22 × $1,500 = $330. That $330 is not Priya's actual extra income tax for the year; it is payroll's estimate. If Priya instead wants the bonus aggregated with regular pay, use Pub. 15-T on the combined amount and her W-4. Do not invent a 12%/22%/24% annual bracket stack to "do FIT by hand" unless you have the current Pub. 15-T worksheet open.

Qualified overtime and tips (P.L. 119-21). For tax years beginning after 2024 and ending before 2029, individuals may deduct limited qualified overtime (the extra half portion under FLSA section 7, up to $12,500, or $25,000 if MFJ) and limited qualified tips on Form 1040. Publication 15 is explicit: overtime remains subject to Social Security, Medicare, FUTA, and FIT withholding. Employers use an updated W-4 and Pub. 15-T if the employee wants paychecks to reflect the expected deduction. Bookkeepers who drop overtime from Box 3/5 because "Congress made OT tax-free" fail both the tax and the FLSA chapters.

2026 FICA: rates, wage base, Additional Medicare

IRS Topic 751 and SSA's contribution and benefit base page lock these 2026 figures:

SSA: an individual with wages equal to or larger than $184,500 contributes $11,439.00 to OASDI in 2026, and the employer contributes the same OASDI amount. Check: 0.062 × $184,500 = $11,439.00. After 1993 there is no Medicare wage cap. Additional Medicare Tax is employee-only; Topic 751: begin withholding in the pay period in which wages exceed $200,000 and continue through year-end, without regard to filing status. There is no employer match for the 0.9%.

Employee FICA formula (use this on every CB-style computation):

Employee FICA = 6.2% × min($184,500, FICA wages) + 1.45% × all FICA wages + 0.9% × max(0, FICA wages − $200,000).

Worked annual examples

Example A — $72,000 of 2026 FICA wages (under both thresholds). OASDI: 0.062 × $72,000 = $4,464.00. Medicare: 0.0145 × $72,000 = $1,044.00. Additional Medicare: max(0, 72,000 − 200,000) = 0. Employee FICA = $5,508.00. Employer FICA match = $5,508.00 (no 0.9%). Combined employee rate check: 0.0765 × $72,000 = $5,508.00.

Example B — exactly the Social Security wage base, $184,500. OASDI: $11,439.00 (the published maximum). Medicare: 0.0145 × $184,500 = $2,675.25. Additional Medicare: 0 (still under $200,000). Employee FICA = $14,114.25. Employer FICA = $14,114.25.

Example C — $220,000 of 2026 FICA wages. OASDI: 0.062 × min($184,500, $220,000) = $11,439.00 (wages above $184,500 are not OASDI-taxable). Medicare: 0.0145 × $220,000 = $3,190.00. Additional Medicare: 0.009 × ($220,000 − $200,000) = 0.009 × $20,000 = $180.00. Employee FICA = $11,439.00 + $3,190.00 + $180.00 = $14,809.00. Employer FICA = $11,439.00 + $3,190.00 = $14,629.00 (employer does not pay the $180).

Trap: 0.0765 × $220,000 = $16,830. That wrongly applies 6.2% above the wage base and misses Additional Medicare. Another trap: reporting $14,629 as the employee amount—that is the employer total.

Worked paycheck examples (YTD matters)

Paycheck 1 — still under the OASDI base. Before this check, Priya's 2026 FICA wages are $41,000. This check's FICA wages are $3,200. OASDI: 0.062 × $3,200 = $198.40. Medicare: 0.0145 × $3,200 = $46.40. Additional Medicare: YTD after the check is $44,200, so $0. Employee FICA this check = $244.80.

Paycheck 2 — crossing the OASDI wage base. Before this check, Sam's 2026 FICA wages are $182,000. This check is $8,000. OASDI wages this check = min($184,500 − $182,000, $8,000) = $2,500. OASDI tax: 0.062 × $2,500 = $155.00. Medicare: 0.0145 × $8,000 = $116.00 (no cap). Additional Medicare: YTD after = $190,000, still under $200,000, so $0. Employee FICA this check = $271.00. The remaining $5,500 of the check is Medicare-only for FICA (plus FIT on taxable FIT wages).

Paycheck 3 — Additional Medicare starts mid-paycheck. Before this check, Alex's 2026 FICA wages are $198,500. This check is $4,000. OASDI is already maxed ($198,500 > $184,500), so OASDI this check = $0. Medicare: 0.0145 × $4,000 = $58.00. Wages over $200,000 this check = $198,500 + $4,000 − $200,000 = $2,500. Additional Medicare: 0.009 × $2,500 = $22.50. Employee FICA this check = $80.50. Filing status on Form W-4 is irrelevant to that $22.50. If Alex is MFJ and the couple's combined wages will stay under the return threshold for Additional Medicare, Alex may get the 0.9% back on Form 1040 / Form 8959; Harbor Street still withholds it.

When wages are taxable

Wages are generally subject to FIT withholding and FICA when they are actually or constructively paid—available to the employee without substantial limitation. A December bonus that is only a promise, with the check not available until January 3, is January wages if there was no constructive receipt in December. Tips are treated as paid when the employee reports them to the employer (Publication 15).

Taxable wages (employee FIT/FICA unless a specific exclusion applies): cash wages, bonuses, commissions, prizes and awards for service, most sick pay, vacation pay paid, back pay, taxable fringe benefits, personal use of a company car to the extent required by Pub. 15-B, and nonaccountable reimbursements. Elective deferrals to a 401(k) generally reduce FIT wages (Box 1) but remain FICA wages (Boxes 3 and 5). That split is a standard bookkeeper exam point.

Nontaxable under an accountable plan: Publication 15 requires all three rules: (1) the employee paid or incurred allowable business expenses performing services as your employee, and the payment is for those expenses, not a substitute for wages; (2) the employee substantiates the expenses within a reasonable period; (3) the employee returns excess advances within a reasonable period. Amounts that meet the plan are not wages and are not subject to FIT, Social Security, Medicare, or FUTA. Publication 15's safe-harbor timing: advance within 30 days of the expense, account within 60 days, return excess within 120 days—or a quarterly statement with 120 days to clear.

If substantiation or return of excess fails, the excess is treated as paid under a nonaccountable plan and becomes wages (usually supplemental wages) for the first payroll period after the reasonable period ends. Per diem or mileage that exceeds the federal rate is wages to the extent of the excess; the substantiated federal-rate portion can be nontaxable, with the nontaxable mileage shown in Form W-2 box 12, code L.

Worked contrast — July 2026 road trip versus a bonus. Locked IRS standard mileage for July 1–December 31, 2026 is 76 cents per business mile.

• Maya drives 200 substantiated business miles to job sites in July under Harbor Street's accountable plan and returns unused advances. Reimbursement = 200 × $0.76 = $152.00. Not wages. No FIT, no FICA, no FUTA on the $152.
• Harbor Street also pays Maya a $1,500 performance bonus on the same check. The bonus is wages. FICA (still under the wage base): OASDI 0.062 × $1,500 = $93.00; Medicare 0.0145 × $1,500 = $21.75; employee FICA on the bonus $114.75. FIT: optional 22% if separately identified = $330, or aggregate with regular wages using Pub. 15-T. If the bookkeeper instead pays a $400 monthly auto stipend with no logs and no return of excess, the $400 is a nonaccountable wage, not a mileage plan.

In-kind wages. Paying in goods, lodging, or services is generally wages at fair market value for FIT and FICA unless a specific exclusion (for example, many employer-paid health plan premiums under section 106) applies. Specify reimbursements separately when a single payment mixes wages and expense repayments.

Putting a paycheck together (Harbor Street, still under the OASDI base)

Maya's workweek from section 6.2 paid $1,248 cash wages. She has a $80 401(k) elective deferral. Accountable mileage $152 is paid on the same ACH but coded as a reimbursement, not wages.

Employee FICA on $1,248: OASDI 0.062 × $1,248 = $77.38; Medicare 0.0145 × $1,248 = $18.10; total $95.48 (Additional Medicare $0). FIT is whatever Pub. 15-T produces from Maya's W-4 on $1,168, not on the $152 mileage. Net pay then subtracts FIT, FICA, the $80 deferral, and any other deductions, and adds the $152 reimbursement.

Exam traps: (1) applying 6.2% above $184,500. (2) capping Medicare at $184,500. (3) waiting for MFJ confirmation before withholding Additional Medicare at $200,000. (4) employer-matching the 0.9%. (5) treating accountable mileage like a bonus. (6) treating a bonus like accountable mileage. (7) excluding 401(k) deferrals from FICA. (8) using a made-up FIT percentage as if it were the annual tax. (9) skipping FICA on overtime because of the Form 1040 qualified-overtime deduction.