Everything You Need to Know About FICA Tax

What is FICA Tax?

FICA is a mandatory payroll tax that is split equally between the employees and the employers. Employers in the USA must withhold a part of their employees' income according to the FICA law. This part is paid to the government, hence the term 'payroll tax.'

A portion of the FICA tax is reserved for Social Security, while the other goes toward Medicare.

FICA stands for Federal Insurance Contributions Act. One might wonder, what does insurance have to do with Social Security and Medicare?

Well, Social Security and Medicare taxes are ‘insurance‘ taxes. Social Security includes old-age, survivors, and disability insurance taxes. Medicare includes hospital insurance tax.

So, contributing to the FICA tax means that you are contributing to the Social Security and Medicare programs. Like any other insurance program globally, these programs distribute benefits to eligible individuals who have paid into them.

FICA taxes are an employer’s responsibility. However, the employer splits the cost 50/50 with the employee by withholding half of the amount due from the employee's paychecks. The employer spends both portions of FICA, their own, and the employees' to the IRS using the Electronic Federal Tax Payments System (EFTPS). Those deposits happen either semi-weekly or monthly. It all depends on the average size of their deposits from the past year.

(All new businesses start by depositing monthly.)

Also, each quarter, employers have to send a quarterly payroll tax report (Form 941) to the IRS. All this amount does is reconcile the amounts deducted from employee paychecks and amounts due from employers with semi-weekly or monthly deposits.

This Form 941 is due on the last day of the month after the end of each quarter.

How Much is FICA Tax?

A total of 15.3% is the FICA tax rate, out of which 12.4% counts toward Social Security tax and 2.9% counts toward Medicare tax. This 15.3% is divided between the employer and employee, each paying 7.65%

But, calculating FICA is not that simple. The process is more than just multiplying the employee’s gross income by the FICA tax rate. The part of the FICA allocated to social security is capped every year at a set amount, known as the wage base of Social Security.

For 2021, this wage base is $142,800, up from $137,700 in 2020 and $132,900 from 2019.

This means that if an employee makes $142,800 or less in 2021, the employers and employee both pay 7.65% of the employee’s full salary to FICA taxes. If the employee earns more than $142,800, then the Social Security portion of FICA (which is 6.2% each from the employer and the employee) only applies to the first $137,700 of their wages.

However, there is no such base limit for the Medicare portion of FICA taxes. So, both the employer and the employee pay 1.45% of the employee’s salary, irrespective of how much the employee makes.

Let’s take the example of Shantel Johnson. She runs an agency in Lousiana, New Orleans. The salary she pays to herself is $150,000. Also, she has an employee with a salary of $65,000 annually. Her FICA tax calculation would be like this -  

Shantel has a wage of $150,000, out of which Social security is 6.2% of 142,800, which comes down to $8,853 that Shantel as the employer pays, and $8,853 that her employee pays.

Medicare is 1.45% of $150,000 which is $2,175 that Shantel pays and $2,175 that the employee pays.

The total is $11,028 that both Shantel and the employee pay.

Now the following is how she would calculate FICA taxes for the employee.

Her employee has a wage of $65,000, and 6.2% of that is $4,030, which Shantel and the employee both pay.

The Medicare expenses are at 1.45% of $65,000, which is $942.5, which Shantel and her employee also both pay.

So the total FICA taxes of her employee comes to $4,972.50, which she pays, and also her employee.

Business owners don’t have to pay such a matching portion of the additional Medicare tax, but they are required to withhold it if they make payments over $200,000 to an employee in a calendar year.

Self-employed persons are covered under a different Act known as the SECA (the Self-Employed Contributions Act). They must pay both the employee's and employer's parts of the FICA tax. However, they are allowed to deduct the employer's part of the tax as a business expense. Moreover, quarterly earnings below the $400 mark are exempt under SECA.

Other FICA Tax Exemptions

The FICA tax applies to nearly everyone and is compulsory, including resident aliens and even many non-resident aliens.

Yet, there are certain exemptions to this. Here are a few of the exemptions that apply under the FICA Law:

• Payment to the taxpayer's child who is a minor and working in their business is exempt from the FICA tax. However, the tax needs to be paid if the business is a corporation or a partnership.
• The tax does not need to be paid by most civilian employees of the Federal Government hired before 1984. They pay Medicare taxes but are not covered by the Social Security benefits under FICA.
• Some state and local government employees with pension plans are also exempt.
• On-campus university student employment of various kinds is also exempt from the FICA tax.
• Post-death wages paid to the worker's family
• Wages of disabled workers after they became eligible for disability insurance benefit under social security.
• Tip income if less than $20 in a month
• Workers' compensation payments

For the complete list of the special rules for various types of payments, you can check out the table in IRS Publication 15.

FICA FAQs

The following are some of the most commonly asked questions about FICA.

Is FICA a Social Security?

Not really. Yet, they are closely related. FICA taxes help fund many different Social Security benefits, including retirement, disability, and survivor benefits, and provide a portion of the Medicare budget, as mentioned above.

Employees earn credits for Social Security benefits as they work and pay FICA taxes. Today's FICA taxes help pay for the current retirees and other beneficiaries' benefits. If any funds are left over, they go into the Social Security trust funds to pay for such benefits in the future.

Is FICA a federal tax?

FICA is a federal tax. The Federal Government mandates most businesses to withhold three major taxes from employee paychecks: federal income taxes and two FICA taxes.

You may also need to withhold SUTA or state unemployment taxes and disability taxes, depending on your state and local laws where your business has its employees.

Is FICA deductible?

The employer's portion of FICA is a deductible expense for the business, while the amounts withheld from an employee’s wages aren’t deductible. However, the salary from which you withhold FICA taxes is a deductible business expense.

Businesses can deduct employees' salaries and the employer's portion of FICA on their annual federal tax return.

How does FICA apply to self-employment?

Unless the business you run is incorporated, you pay self-employment tax on your wages instead of the FICA tax. Social security tax and Medicare tax are a part of the self-employment tax, just like FICA.

The self-employment tax rate is the same as the total FICA amount and is split between employers and employees.

Exactly 15.3% of your earnings count toward the self-employment tax, 12.4% toward Social Security tax, and 2.9% toward Medicare tax.

The base of the Social Security wage and the additional Medicare tax applies to self-employment tax.

Do you know how you can reduce tax deduction over your travel expenses. This is possible with efficient tax management and planning. One of the tools businesses use to limit their tax liability is to claim deductible business expenses.

How to pay FICA payroll tax?

Once you withhold FICA tax from employees' wages and contribute your portion, it’s time to send this to the IRS.

Remember to deposit and report the amounts before your employment tax due dates, depending on what type of depositor you are. They are either monthly or semi-weekly.

The depositing schedule depends on the total tax liability you reported during a four-quarter lookback period. You must determine the depositing schedule annually before the beginning of every year.

You should deposit the FICA taxes along with federal income taxes. You can deposit all employment taxes using the IRS’s Electronic Federal Payment System (EFTPS). If you use a Full-Service Payroll, they will deposit the taxes on your behalf.

Do you know how you can car tax deduction over your travel expenses. Section 179 allows businesses to claim the full purchase amount for a new piece of equipment in a single year, contingent on the fact that it is bought and put to use on the business in the same year.

Conclusion

Paying FICA taxes requires sound knowledge of the relevant guidelines and specifics for tax calculations and reporting. If the employer has paid taxes above the required amount, ten employees will receive a refund when they file their taxes.

It's always a great idea to outsource your bookkeeping needs to expert services like Fincent to ensure that your finances are taken care of while you focus on building your business.