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FICA Tax & Who Pays It: Federal Insurance Contributions Act

August 02 2023 •
Tax Tips

FICA taxes are mandated payroll taxes that benefit federal insurance programs. In this article, we are discussing what FICA taxes are, how they’re paid, and what they mean for employers and employees.

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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.

Blue banner with orange buttons and the text "FICA requires employees to pay the following for their employees".

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.

Blue banner with a white envelope graphic and text "The Federal Insurance". Contributions Act FICA requires employers to withhold three separate taxes from the wages paid to their employees

FICA tax exemptions

If 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 taxes

If 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.

What Happens When I’m Eligible for Social Security and Medicare?

When you will be eligible to collect Social Security and Medicare benefits depends on your “retirement age,” which depends on the year you were born. In addition, the amount of money you are actually entitled to will also depend on your retirement age. For example, if you start retirement at age 63, your monthly benefit amount is reduced by about 25%. Deductions decrease the older you are when you retire—for retirees age 67 receiving the maximum benefits, by about 50%.

Medicare benefits are separate from SSDI (Social Security Disability Insurance), so eligibility requirements are different to qualify for Medicare. If you are over 65, you can collect your benefits—but you may also qualify for other reasons.

Taxes on Social Security

Once you become eligible for Social Security and start collecting, you may be surprised to find out that Social Security is still a taxable form of income.  The taxable amount on your Social Security or SSDI is dependent on your filing status as well as any other retirement income you may collect.

So how do you determine what you owe on your Social Security income? Filing IRS Notice 703 helps taxpayers identify whether their Social Security benefits are taxable in a given year. This information can help retirees and other Social Security beneficiaries budget their collections and avoid mounting back taxes.

If you are already collecting Social Security, you should automatically receive Form SSA-1099, which will show you the amount you’re entitled to—but this form will not include whether your benefits are considered taxable income. Using Form SSA-1099, you can complete IRS Form 703 to find out if you do in fact owe the government in federal income taxes.

Setting Yourself Up For FICA Tax Success

Whether you’re an employee or an employer working for a business operating in the United States, you’re most likely subject to owing FICA taxes. Knowing exactly what amount you’re responsible for is important to remain in good standing with the IRS. Failing to pay your payroll taxes can result in serious consequences and back taxes later on. Our Community  Tax experts can help both employees and employers understand and properly file their employment taxes, so contact a representative for more information.