There are certain taxes on income that everyone has to pay, and FICA (Federal Insurance Contributions Act) taxes for Social Security and Medicare are at the top of the list. Employers must withhold these taxes from employee paychecks and pay them to the IRS. FICA taxes are called payroll taxes because they are based on income paid to employees.
FICA taxes have two elements that are withheld from employee paychecks and paid by employees:
- Social Security (Old-Age, Survivors and Disability Insurance or OASDI) and
The Breakdown of FICA Tax
The total FICA tax is 15.3% based on an employee's gross pay. The employer and employee each pay 7.65%. Here is a breakdown of these taxes:
- Within that 7.65%, the OASDI (Old Age, Survivors, and Disability program, AKA, Social Security) portion is 6.2%—up to the annual maximum wages subject to Social Security.
- The Medicare tax is 2.9% – 1.45% for employees and employers on all employee earnings with no limit.
- There is also an additional Medicare tax of 0.9% for higher-income employees that must be withheld when the employee's income reaches $200,000 for the year. Employees must pay this tax, but employers don't have to pay for it.
Payments Not Subject to FICA Taxes
Some payments to certain individuals are not subject to FICA taxes. For example, the income of self-employed business owners is not withheld under the FICA system, but there is a different law requiring the payment of these taxes, called the Self Employed Contributions Act (SECA).
Payments to your child under age 18 who is working in your business are not subject to Social Security and Medicare taxes (unless the business is a corporation or partnership) but payments to your spouse or your parent as an employee are subject to these taxes.
Wages Exempt From FICA Tax
Some types of payments to employees are not included in Social Security wages. FICA tax calculation for Social Security/Medicare wages begins with the employee's gross pay, but some payments must be taken out of this calculation. The wages exempt from FICA tax may be different from wages exempt from federal income tax or federal unemployment (FUTA) tax.
IRS Publication 15 (Circular E) has a table listing all the special rules for various types of services and payments for federal income tax withholding, FICA taxes, and FUTA tax.
How FICA Taxes Are Calculated
To calculate the FICA withholding for employees, you must take the employee's gross pay (including overtime) and multiply by the employee rate of 7.65%. There are two important points you must watch in your calculations:
- You must ensure that each employee's total gross pay for the year does not exceed the Social Security maximum for the current year because you can't deduct more than the maximum Social Security amount each year.
- You must also ensure that the additional Medicare tax is withheld on the earnings of higher-paid employees when their earnings reach $200,000 in a year.
There is no maximum Social Security tax for employers and there is no maximum Medicare tax for employers or employees.
Withholding Too Much FICA Tax
If you continued to deduct Social Security tax above the maximum, you withheld too much FICA tax and must refund the money to the employee. Make sure your payroll software doesn't count this as income to the employee; it doesn't affect the employee's gross pay so it's not income.
Paying and Reporting FICA Taxes
You must send FICA tax deposits—along with amounts withheld from employee pay for federal income tax—to the IRS periodically. You must make deposits of these amounts either semi-weekly or monthly, depending on the average size of deposits for the past year (new businesses deposit monthly).
Employers must send a quarterly payroll tax report to the IRS on Form 941, including information FICA taxes withheld from employee pay for the quarter and the employer portion of those taxes that must be paid.
This report, due on the last day of the month after the end of each quarter, shows amounts deducted from employee paychecks, amounts due from employers, and amounts paid during the quarter.
FICA taxes were set up by the Federal Insurance Compensation Act (FICA) in the 1930s, first to fund the Social Security benefits program, and later, the Medicare program. A separate program, called the Self-employment Contributions Act (SECA) of 1954, requires self-employed individuals to pay Social Security and Medicare taxes on their self-employment income.
The rates for self-employment tax are 12.9% for the Social Security portion and 2.9% for Medicare. Half of this amount is deducted from the person's tax due, but this deduction doesn't affect the calculation for benefit purposes.The maximum for Social Security also applies to SECA tax, and the additional Medicare tax applies to combined employment and self-employment income.
The information in this article is for general understanding and it's not intended to be tax advice. Consult with a professional tax preparer or attorney before calculating and deducting FICA taxes.