- What is FICA?
- Who Pays FICA Taxes?
- What Happens When I’m Eligible for Social Security and Medicare?
- Setting Yourself Up For FICA Tax Success
What is FICA?FICA, also known as the Federal Insurance Contributions Act, is a tax mandated by the federal government to benefit federal insurance programs such as Social Security and Medicare. These two tax programs are considered a payroll tax, which amount is automatically deducted from employee paychecks. Employers are responsible for withholding this amount and deducting a percentage of their own revenue to contribute to FICA taxes. Federal Insurance Contributions Act tax revenue is allocated to both Social Security and Medicare funds that benefit retirees, widowers, disabled workers, and others in need. These funds help these individuals with hospital insurance and various living expenses during their retirement, as well as other special circumstances. Taxpayers pay in these dues to benefit these communities, and also to eventually collect their own benefits once they are eligible. The FICA payroll tax is divided into five taxes apportioned to the employee and the employer, based on the employee’s taxable income.
FICA Taxes Include:
- Employee: 6.2% Social Security tax
- Employee: 1.45% Medicare tax
- Employee 0.9% Medicare surtax when an employee earns over $200,000
- Employer: 6.2% Social Security tax
- Employer: 1.45% Medicare tax
Who Pays FICA Taxes?Both employees and employers are responsible for contributing to FICA taxes. As you can see from the taxes listed above, employees and employers are responsible for paying the same amount in Social Security and Medicare taxes. In addition, if an employee earns over $200,000, employers are responsible for collection up until wages exceed this limit. The additional 0.9% surtax will be allocated to the employee. Generally, FICA taxes increase with each year, so it’s best to consult a tax expert to get the most accurate information for your FICA tax dues.
FICA tax exemptionsIf you are employed, chances are you’re already paying FICA taxes—but there are some special exceptions which are exempt from paying FICA tax. Examples of exempt services can include:
- Wages paid to an ordained, commissioned, or licensed minister of a church in their ministry.
- Wages paid to students taking a specified number of course credits.
- Wages paid to nonimmigrants or nonresident aliens, dependent on their visa status.
- Wages paid to family employees.
How much do employees pay for FICA?Employees are responsible for paying FICA taxes for wages up to $132,900, based on their taxable income. To calculate your FICA taxes, you’ll first need to calculate your annual gross income. Once you have your annual gross income, add the two tax rates (6.2% + 1.45%) for a total tax burden of 7.65%, then multiply the decimal (0.765) by your gross income to determine your projected FICA tax rate.
How much do employers pay for FICA?In general, employers are responsible for matching employee FICA tax contributions. For qualifying small businesses, the IRS gives tax breaks on payroll taxes. Employers who owe $1,000 or less in employment taxes may file Form 944 with the IRS. The IRS should contact you automatically if you qualify for a reduced employment tax rate. If an employee’s wages exceed $200,000 per year, the employer is only responsible for Medicare taxes to this limit, with the 0.9% surtax being the employee’s responsibility.
Self-employment and FICA taxesIf you’re self-employed, you will need to pay your FICA taxes directly to the IRS. Since you are your own employer, you will not have an automatic deduction from your paychecks. Self-employed individuals are responsible for paying the combined Social Security FICA tax rate for employee and employer (12.4%), as well as the Medicare FICA tax rate (2.9%). To pay your FICA taxes as a self-employed individual, you will need to file the following tax forms before April 15 to report your income if it exceeds $400 for the year, as of 2019.
- IRS Form 1040
- Schedule C Form (Profit or loss from sole proprietorship) or Schedule F Form (Profit or loss from farming)
- Schedule SE Form (Self-employment tax)