There are certain taxes on income that everyone has to pay, and Federal Insurance Contributions Act (FICA) 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.
- Social Security and Medicare taxes are known as Federal Insurance Contributions Act taxes, or, "FICA" taxes.
- FICA taxes add up to 15.3% of an employee's gross pay: 7.65% for the employee, and 7.65% for the employer.
- Social Security taxes total 12.4% and are split evenly between employer and employee.
- Medicare taxes are 2.9% total, and split 50-50 between employer and employee.
What Is the FICA Tax?
- The Social Security portion of FICA taxes 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 surpasses $200,000 for the year. Employees must pay this tax, but employers don't have to pay for it.
"Is FICA Social Security?" is a common question related to FICA taxes. The answer is that FICA taxes include Social Security taxes but are not just Social Security taxes.
Payments to your child under the age of 18 who is working in your business are not subject to Social Security and Medicare taxes if the business is a sole proprietorship or a partnership "in which each partner is a parent of the child," the IRS notes. Payments to your spouse or your parent as an employee are subject to FICA taxes.
Wages Exempt From FICA Tax
Some types of payments to employees are not included in Social Security wages. Generally speaking, payments that aren't considered earned income are free from Social Security taxes, including pension payments, distributions from a qualified retirement plan, and workers' compensation.
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 and multiply it 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 wage limit for an employee's Medicare taxes.
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. If you cannot provide the full refund, the employee will have to file a claim with the IRS.
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.
You must make all payroll tax deposits via electronic funds transfer.
The Self-Employment Contributions Act (SECA) 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. The self-employed taxpayer can deduct half of their SECA tax when they're calculating their adjusted gross income. The maximum for Social Security also applies to SECA tax, and the additional Medicare tax applies to combined employment and self-employment income.
Frequently Asked Questions (FAQs)
Is FICA the same as Medicare and Social Security?
In the context of employment taxes, they are the same. FICA taxes are made up of Medicare taxes and Social Security taxes.
Who pays Social Security and Medicare taxes?
Employees are typically responsible for half of their Social Security and Medicare taxes and their employer is responsible for the other half.