What is the FICA Tax and How Does It Work?

The revenues from this tax finance the nation’s Social Security program and Medicare program. Self-employed persons pay both halves of both taxes for a total of 15.3% of their net business earnings. These taxes are reported on Schedule SE with their income tax returns.Self-employed persons can deduct the employer-equivalent portion of self-employment tax in figuring their adjusted gross income (AGI). FICA tax is typically 7.65% of earnings up to $127,200 (2017 figure).

For income above that, they pay an additional Medicare tax of 0.9%. Employers match the 1.45% rate but are not responsible for matching the 0.9% rate. The Federal Insurance Contributions Act requires employers to withhold Social Security and Medicare taxes from employees’ wages. It is mandatory and ultimately the employer’s responsibility to fulfill. Small business owners who fail to collect, report or remit payroll taxes to the IRS face penalties and interest on the money they owe.

Calculating the withholding and employer’s portion amounts

For 2023, self-employed workers and independent contractors pay a total of 15.3 percent in FICA taxes. Two separate taxes are added together and treated as one amount that is referred to as “payroll taxes” or FICA. These two taxes, individually, pay for both Social Security retirement benefits and Medicare health insurance. Paying FICA taxes is mandatory for most employees and employers under the Federal Insurance Contributions Act. The funds are used to pay for both Social Security and Medicare.

• Policy makers are considering a variety of actions that could rectify this situation.
• These include raising the full retirement age (currently age 67), decreasing the financial benefits received, in particular by high earners, and increasing the payroll tax rate.
• Because this is such a critical payroll tax, business owners need to know exactly what these FICA taxes entail, how to calculate them and when to pay them.
• As with Medicare tax, self-employed individuals will have to pay both the employee and employer portion of Social Security Tax.
• These two taxes, individually, pay for both Social Security retirement benefits and Medicare health insurance.

An employee earning $250,000 and filing singly will pay $13,282.40 in FICA contributions in 2023. That breaks down to $9,932.40 in Social Security tax and $3,350 in Medicare tax. The wage earner’s employer would pay slightly less because they aren’t required to pay the additional Medicare tax of 0.9% on the $50,000 above the $200,000 threshold.

FICA and Withholding: Everything You Need to Know

Once the threshold is reached, the tax applies to all wages that are currently subject to Medicare tax, to the Railroad Retirement Tax Act, or to the Self-Employment Contributions Act (SECA). You withhold the 0.9 percent Medicare surtax only to the extent you pay an employee wages in excess of $200,000 in a calendar https://accounting-services.net/ year. You do not begin withholding the Medicare surtax until the pay period in which you pay wages in excess of $200,000 to an employee. The Federal Insurance Contributions Act (FICA) of 1935 established a payroll tax on U.S. wage earners’ paychecks and called for matching contributions from employers.

What Is FICA Tax? Understanding Payroll Tax Requirements

Because the Medicare tax has no earnings ceiling, you must pay the 1.45 percent tax on all of your earnings. You must pay an extra Medicare tax if you file your taxes as a single individual and earn more than $200,000 per year. This tax is determined at 0.9 percent of your earnings exceeding $200,000 per year. If you are married and file jointly, the extra tax will be levied on earnings in excess of $250,000. Paying FICA taxes entitles you to disability and life insurance benefits as well. Provided you become disabled, you may be eligible for Social Security disability payments if you meet specific conditions and have the required amount of Social Security credits.

Is FICA the same as Social Security?

In return, Social Security would provide them financial benefits when they got older. In 1965, the FICA tax expanded to include a tax for Medicare, a kind of health insurance for retirees, disabled workers or survivors of workers. Employers and employees each pay the FICA tax rate of 7.65%, which goes https://quickbooks-payroll.org/ toward Social Security and Medicare taxes. Again, this rate is applied to each employee’s taxable wages. All in all, the IRS receives 15.3% on each employee’s wages for FICA tax. In addition to the FICA amounts withheld from employees’, the employer must match the FICA taxes withheld from employees.

While most employees must pay FICA taxes, there are some exceptions. Employees who have worked for the government since before 1984 https://accountingcoaching.online/ may not have to pay Social Security taxes. Use the table below to see how much you must withhold and contribute each pay period.

Nonetheless, payroll services can automate all of your tax-payment and tax-filing needs — and that’s the smart way to go even if you love math. Between what you’ve learned about FICA taxes and the infrastructure you can implement around them, tax time will be a breeze. Now, we’ve been talking about FICA taxes, which are federal taxes used to fund Social Security and Medicare. Unless your business is incorporated, you pay self-employment tax on your wages instead of FICA tax. Self-employment tax is made up of Social Security and Medicare taxes, just like FICA. Let’s say you have three employees who all earn below the Social Security wage base and additional Medicare tax thresholds.