FICA: What is FICA tax?

As a small business owner, there are a variety of taxes you have to pay when running payroll. From withholding federal income taxes to Federal Unemployment Tax Act (FUTA) taxes, these costs can really add up. Therefore, it only makes sense that you’d want to know what taxes you’re paying and why you’re paying them.

Payroll taxes fund social programs that often aim to protect workers and offer financial support to those who need it. One of the most significant payroll taxes that employers and employees must pay are Federal Insurance Contributions Act (FICA) taxes. The revenue generated by FICA taxes goes toward funding Social Security and Medicare in the U.S.

If you want to learn more about what the FICA tax is, you’re in the right place. In this article, we’ll explain how the FICA tax works and what the FICA tax rate is for 2021. For an in-depth look at the FICA tax and all that it entails, read from start to finish. Or, if you’re interested in a particular section, use the links below to navigate the article.

Federal Insurance Contributions Act (FICA) definition

The Federal Insurance Contributions Act is a law that imposes a tax on employers and employees. The law was passed in 1935, at the same time that Social Security was established in the United States. The tax revenue generated by FICA funds Medicare and Social Security.

Because of FICA, Medicare and Social Security are self-funded benefits. This means all U.S. taxpayers contribute a percentage of their income to support these programs. Thus, virtually everyone can reap the benefits of these programs once they become eligible.

What is FICA tax?

The FICA tax is a payroll tax that both employees and employers are responsible for paying. FICA taxes are payroll deductions that come directly from an employee’s paycheck, with employers being responsible for calculating this payroll withholding. The employer’s share of FICA tax liability is equal to that of their employees.

So, what does the FICA tax consist of? FICA taxes financially support two major federal government programs: Social Security and Medicare. Social Security is managed by the Social Security Administration, and it’s a type of insurance that everyone is required to pay into. It is well-known for providing benefits to retirees, but the program also provides disability insurance and survivor benefits.

Medicare, on the other hand, is the federal health insurance program of the United States. Medicare programs provide health insurance for people of old age (65 and older) or, in some cases, younger individuals with disabilities. Given the expensive nature of healthcare in the U.S., Medicare can prevent vulnerable populations from becoming financially insecure due to health problems.

Are FICA and Social Security tax the same thing?

The short answer is yes—the FICA tax encompasses Social Security taxes. But, the Social Security tax is just one aspect of the FICA tax. As we mentioned above, the FICA tax funds both Social Security and Medicare.

What are the current FICA tax rates in 2021?

Revenues from FICA taxes fund Social Security and Medicare. However, these two programs apply different tax rates. Let’s take a look at each one to see what the FICA tax rates are for 2021.

The tax rate for Social Security is 6.2% for employees, which is matched by a 6.2% rate for employers. This brings the total Social Security tax rate to 12.4% in 2021.

Keep in mind, though, that the Social Security tax comes with a wage base limit. This wage base limit restricts the total amount of income that’s subject to the Social Security tax rate. The limit also tends to change nearly every year due to inflation. For 2021, the Social Security wage base limit is $142,800. This means that any earnings that exceed this figure are not subject to the Social Security tax.

Now let’s take a look at the Medicare tax rate for this year. In 2021, the Medicare tax rate is 1.45% for the employee and an additional 1.45% for the employer. This brings the total Medicare tax rate for 2021 to 2.9%. In contrast to the Social Security tax, the Medicare tax doesn’t have a wage base limit and is imposed on all applicable income. In fact, individuals earning gross wages exceeding $200,000 in a calendar year must contribute an additional 0.9% of their income in Medicare tax.

How to calculate FICA tax

FICA taxes are calculated as a percentage of an employee and employer’s income. Since employees and employers both pay the same amount in FICA taxes, you can figure out what you both owe with a simple calculation.

Step 1: Combine Social Security and Medicare taxes. For 2021, the tax rate comes out to 7.65%.

Step 2: Multiply the total FICA tax rate, or 7.65%, by an employee’s pay.

Step 3: As an employer, you would be responsible for matching this figure.

Note: You should also keep in mind that this is the most basic scenario. It doesn’t account for employees who earn an excess of $200,000 annually, in which case you would have to withhold additional Medicare tax.

FICA tax example

Here, we’ll go through an example of calculating this payroll tax. Let’s say that an employee earns a $50,000 salary in 2021. To calculate FICA taxes, you’d just have to apply the 6.2% Social Security tax rate, along with the 1.45% Medicare tax rate. We can break it down with the following calculations:

[$50,000] x [0.062] = $3,100 in Social Security tax

[$50,000] x [0.0145] = $725 in Medicare tax

[$50,000] x [0.0765] = $3,825 in total FICA tax

These calculations account for the employee’s portion of the FICA tax. As an employer, you’d need to match that amount in order to pay your own portion of FICA.

The above calculations are a simple representation of what a worker’s FICA tax liability could look like. In reality, most employers don’t want to manually perform these calculations for every employee, and rely on payroll software to automate these time-consuming tasks.

Who pays FICA taxes?

Pretty much everyone pays FICA taxes. Individuals are responsible for paying it whether they’re full time or part time, salaried or hourly, a resident or nonresident. Yet, there are a few exceptions you should be aware of.

Groups that don’t have to contribute FICA taxes include:

  • College students earning money through an on-campus job
  • Certain religious groups that qualify for exemptions
  • Certain nonresident alien teachers, scholars, and foreign government employees

Parties who may qualify for an exemption from FICA taxes can apply for that exemption using Form 4029. However, it’s important to note that individuals who don’t contribute FICA taxes are typically not eligible for Medicare or Social Security benefits.

Do self-employed individuals pay FICA taxes?

You’re not responsible for paying FICA as a self-employed person unless your company is incorporated. If it isn’t, then you can pay self-employment taxes rather than FICA taxes. Self-employment taxes cover the same programs as FICA taxes. Currently, the self-employment tax rate is 15.3% of your wages—12.4% for Social Security and 2.9% for Medicare.

If you work as a freelancer, your tax requirements may be different. See our article on taxes for freelancers for more information.

What is the wage base limit for Social Security tax?

In 2021, the wage base limit for the Social Security tax is $142,800. Any amount earned beyond this figure won’t be subject to additional Social Security tax.

Paying and reporting FICA taxes

As we mentioned earlier, both employees and employers are responsible for paying FICA taxes. In this section, we’ll take a closer look at the responsibilities of these parties when it comes to reporting and paying.

As an employer, you’re responsible for withholding FICA taxes from the wages of your employees. Once you’ve collected employee FICA withholdings and matched these amounts, you must send the Internal Revenue Service (IRS) the money. When and how you do this depends on your depositing schedule, which you establish at the beginning of each year. You may deposit employment taxes on a monthly or semiweekly basis, depending on your total tax liability.

To actually deposit FICA tax withholdings, you’ll follow the same procedure you would for federal income taxes. Use the IRS Electronic Federal Tax Payment System to securely deposit payroll taxes by the applicable deadline. Alternatively, you can use an automated payroll service, which will automatically deposit your employment taxes to the IRS.

As far as reporting FICA tax, you may use Form 941 or Form 944. Most often you’ll use the former, which is a quarterly tax return for employers. Only use Form 944 if directed to by the IRS.

When are FICA taxes deferred under the CARES Act due?

The CARES Act was signed into law by former President Donald Trump as a response to the economic toll of the coronavirus. One significant benefit of this act is that it allows employers to postpone paying their share of Social Security taxes through December 31, 2020. At the end of this year, on December 31, 2021, 50% of the postponed amount will be due. The other 50% will be due the following year, on December 31, 2022.

Are FICA taxes deductible for businesses?

Any FICA taxes that you contributed as an employer are considered a deductible expense. Additionally, the employee salaries that you deduct FICA taxes from are seen as a deductible expense. However, you cannot deduct FICA taxes you withheld from employee wages on your annual federal tax return.

Payroll software simplifies FICA and payroll tax responsibilities

While FICA tax is simple at its core, it’s a payroll expense that can get complicated really fast. If you employ a lot of people or pay some employees a high gross income, the process of calculating FICA tax can get tricky. Calculating withholdings, depositing taxes on time, and reporting to the IRS can turn into a big headache.

To simplify the process, use QuickBooks Payroll. With our easy-to-use payroll service, you can automatically calculate FICA taxes, withhold them from employee paychecks, and generate payroll reports. Plus, our software can file and report your payroll taxes to the IRS. This frees up time for you to focus on your business while letting us handle the numbers.

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