Payroll
The two tax bases most software gets wrong
A US paycheck has two different taxable wage bases, and confusing them under-reports FICA for both the employee and the employer.
Why there are two bases
Section 125 deductions — health, dental, HSA, FSA — reduce both federal income tax withholding and FICA. A traditional 401(k) deduction reduces income tax withholding but does NOT reduce FICA.
That means the base for federal withholding and the base for Social Security and Medicare are different numbers on the same paycheck. Kangaroo ERP tracks them separately, which is also why boxes 1, 3 and 5 of the W-2 legitimately differ — the single most common question a payroll department gets in January.
| Deduction | Reduces income tax withholding | Reduces FICA |
|---|---|---|
| Section 125 (health, dental, HSA, FSA) | Yes | Yes |
| Traditional 401(k) | Yes | No |
| Roth 401(k) | No | No |
| Garnishments, voluntary insurance | No | No |
What is computed on every paycheck
- Federal withholding via the Publication 15-T percentage method, with the full Worksheet 1A visible step by step.
- Social Security at 6.2% up to the annual wage base, tracked against year-to-date so it stops exactly at the cap.
- Medicare at 1.45% with no cap, plus the 0.9% Additional Medicare on the employee only — the employer never matches that one.
- FUTA at the net rate after the SUTA credit, with credit reduction states handled at the annual return.
- SUTA, state disability and paid family leave for the employee's work state, each with its own wage base.
- Interstate reciprocity applied automatically where an agreement exists, and flagged on the paycheck.
Gross is not what payroll costs
Adding the employer half of FICA plus FUTA and SUTA, a $4,000 gross paycheck typically costs the business closer to $4,400. Kangaroo ERP shows the real employer cost on every pay run, not just the gross.
Run a payroll and see the worksheet
Every figure expands into the calculation that produced it.
Start free