This article was written by Mary Pons, Payroll Specialist at Helpside.
FICA stands for Federal Insurance Contribution Act and is a US Federal payroll tax that helps fund Social Security and Medicare benefits. FICA is a shared tax, meaning that employees and employers both pay a portion of the taxes. Every employer must calculate and withhold the appropriate amount of FICA tax from employees and submit that along with the employer matching portion to the IRS.
Once it has been determined that an employee’s compensation is subject to FICA taxes there are no withholding exemptions or allowances to consider nor is the age of the employee any factor in the matter. The withholdings must begin as soon as wages are actively being paid. Calculating FICA tax is a little more complicated than just multiplying the employees gross by the FICA tax rate. The amount withheld for social security and Medicare is calculated by applying a fixed rate to the employee’s taxable wages. On the social security portion that is only applied on wages up to the taxable base know as the wage base. There is no Medicare wage limit.
Social Security Tax
As of 2022 the employee and employer shared responsibility on the Social Security tax withholding rate is 6.2% up to the taxable wage base of $147,000. Any wages paid over $147,00 in a year have no social security tax applied.
The Medicare portion of taxes paid by both the employee and employer is 1.45% with no wage base, so this is tax paid on all wages. There is an additional Medicare tax of 0.9% for certain groups of employees. These groups include:
- Married employees filing separately with an income greater than $125,000
- Married employees filing jointly with an income greater than $250,000
- Single employees with an income greater than $200,000
Employers do not match the additional Medicare Tax.
How Do Employers Pay FICA?
Each quarter, employers must send quarterly tax reports (941 forms) to the IRS. 941 forms are due on the last day of the month after each end of the quarter. FICA tax payments are required to be deposited using the electronic Federal Tax payment system (EFTPS). Those can happen either semi-weekly or monthly.
How Do Self-Employed Individuals Pay FICA?
Self-employed individuals (such as independent contractors) must pay both the employer and the employee shares of the Social Security and Medicare taxes. This is a total combined rate of 12.4% for Social Security up to the wage base and 2.9% for Medicare in 2022. They are also responsible for the .90% on additional Medicare tax if they meet the income levels listed above. These taxes are due when the individual files their personal income taxes.
What Types of Employment Are Exempt from Social Security and Medicare Taxes?
Very few types of employment are exempt from FICA taxes. Here are some examples:
- Work done by temporary agricultural workers
- Work performed by a child under the age of 18 for his or her parents (age 21 if the work is outside the course of the employer’s trade or business or is domestic service)
- Work on a foreign ship or aircraft outside the U.S by a non-U. S citizen for a non-U. S employer
- Work done by students who are enrolled and regularly attending classes at the school for which they are working and who are not “career employees” of the school (unless the school is a public educational institution that has opted for FICA coverage of student employees)
What Wages Are Exempt from Social Security and Medicare Taxes?
All employee compensation is subject to Social Security and Medicare taxes unless specifically exempted under the Internal Revenue Code. Here are a few examples of exempt payment types:
- Payments made under a state workers’ compensation law
- Noncash payments to an employee for work done outside the employer’s trade or business or for domestic service in the employer’s home
- Cash payments to an employee for domestic service totaling less than $2,400 for 2022 (indexed annually for inflation)
- Cash payments to an employee for work done outside the employer’s trade or business totaling less than $100 for the year
- Cash tips totaling less than $20 in a month and noncash tips
- Death or disability retirement benefits paid under an employer plan
- Wages paid to an employee’s beneficiary after the year of the employee’s death
- Reimbursement for or provision of excluded educational or dependent care assistance
- The value of excludable meals and lodging provided by the employer
Paying employees correctly and ensuring you comply with all employment tax laws can be complicated. The experts at Helpside have over 460 years of combined experience in payroll, giving you the peace of mind that your payroll and taxes will be completed correctly. If you have payroll questions, reach out to our team at firstname.lastname@example.org