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FICA is one of those seemingly random acronyms that business owners have to understand when running payroll. If you’ve ever wondered what the heck FICA stands for, what your responsibilities as an employer are, or what you need to do to get FICA deductions right, you’re in the right place.
FICA fast facts
- Both employers and employees pay FICA to the IRS, which includes Social Security Tax and Medicare Tax
- Employers must pay both the taxes withheld from employee paychecks, as well as their own matching tax contributions, to the IRS on a quarterly basis
- Self-employed individuals pay both the employee tax and the employer tax, which is 12.4% for Social Security Tax and 2.9% for Medicare Tax
- FICA contributions directly fund employee’s social security and medicare benefits, which they can take advantage of later in life
FICA may not sound like a whole lot of fun, but since it’s going to be part of your life every couple of weeks, now is a great time to read all about it. Let’s go into a bit more detail on both FICA taxes and take a look at the 2024 tax rates.
What is FICA tax?
FICA stands for the Federal Insurance Contributions Act, and it was introduced in 1935. It’s a payroll tax that both employees and employers are responsible for paying to the IRS with two components: Social Security Tax (Old-Age, Survivors, and Disability Insurance) and Medicare Tax. These mandatory taxes cover Social Security program funding and feed the federal government’s Medicare trust fund.
What counts as FICA tax?
As we mentioned above, FICA includes social security taxes, medicare taxes, and the additional Medicare tax (also known as the Medicare surtax). All of these taxes are part of FICA, and by paying them, you are contributing to social programs created by the US government that are designed to make social security and medicare payments to older US citizens. Many retired citizens rely on social security payments for regular income and use Medicare to help afford their medical expenses.
Is FICA different than income tax?
The short answer is yes. “FICA taxes and income taxes are two different things, although they do go hand in hand,” explains David Kindness, a CPA with over ten years of industry experience. “Income tax is just that: a tax on your income. Income taxes are levied by federal and state governments (except for a handful of states), and they are calculated as a percentage of your income.”
Another thing to remember is that they’re progressive. “If you make more money, you pay more in income taxes,” he says. “And they’re used to fund the US government’s operations in all kinds of ways.”
FICA taxes, on the other hand, are used by the federal government specifically to fund social security and medicare programs.
“Unlike income taxes, FICA is a flat tax, meaning the tax rate does not change when income levels change: everyone pays the same percentages. Also, whereas income and medicare taxes have no income limit, social security taxes are not imposed after a certain income level.”
— David Kindness, CPA
Are FICA taxes mandatory?
Yes, paying FICA taxes is mandatory in the US. FICA taxes are paid on ordinary earned income (and not on investment or passive income), and they are paid by both employees and self-employed individuals. Employees pay 50% of FICA taxes, and their employers pay the other 50%, whereas self-employed individuals pay 100% of their own FICA taxes.
Next, let’s get familiar with the specifics that make up the FICA tax.
Further reading
After you have finished reading about how FICA works, you might find our guide to the Social Security wage base useful.
Medicare Tax
The second half of FICA is the Medicare Tax. Employers are required to withhold 1.45% of each employee’s taxable wages to cover it. Unlike the Social Security Tax, there is no maximum wage base limit for the Medicare Tax. In fact, higher wage earners that reach a certain threshold amount, a figure that varies depending on their filing status, have to pay what’s called an Additional Medicare Tax (sadly, the IRS didn’t come up with a clever name for this one).
The Additional Medicare Tax rate is 0.9% for every dollar earned above the threshold amount.
For example, the threshold amount for individual filers is $200,000. So an employee who files taxes as a single (unmarried) individual, and whose taxable income is $300,000 for the 2023 tax year, would be responsible for contributing a total Medicare Tax of $5,250.
Medicare Tax: $200,000 x 1.45% = $2,900
Additional Medicare Tax: $100,000 x (0.9% + 1.45%) = $2,350
Total Tax: $2,900 + $2,350 = $5,250
Employers use the $200,000 threshold when calculating the Additional Medicare Tax on their employees’ paychecks, no matter the filing status of the employee.
More details about the Additional Medicare Tax and the threshold amounts for each type of tax filer can be found at the IRS website.
Just like Social Security Tax, employers have to match each employee’s Medicare Tax contribution dollar-for-dollar. However, only employees are responsible for paying the Additional Medicare Tax.
What should you do when an employee exceeds one or both FICA thresholds?
Social Security has a wage limit past which no more tax is taken, and Medicare has a threshold past which additional tax must be taken. So what should an employer do if they bring on a new hire who has met one or both of these criteria with their previous employer?
Thankfully, the IRS provides clear guidance on this situation: employers are to take into account only the wages that they have paid to an employee when calculating FICA taxes. This means that a highly-compensated employee will see Social Security taken once more, and they will not see the additional Medicare tax withheld from their pay until their current employer has paid them subject wages in excess of the $200,000 threshold.
The employee will be able to request a refund for any overpayment of Social Security tax and pay any owed additional Medicare tax when they go to file their annual individual tax return.
Paying the IRS
So far, so good. You’ve withheld both FICA taxes from your employees’ paychecks. Now what?
Now, you pay the IRS. Once a quarter, you are required to pay the taxes withheld from employee paychecks as well as the employer’s matching tax contributions to the IRS. You fill out IRS Form 941, sign it, and hit send.
Simple enough, right?
Just make sure you pay the IRS on time. The payment due date is one month after the end of each quarter. For example, taxes for the quarter ending March 31st are due on April 30th.
After you find out more about FICA
Are you spinning your wheels trying to keep up with all of this payroll lingo? There’s a lot to keep track which is why we developed a glossary with common payroll terms you’re sure to come across as a small business owner.
SECA: FICA for the Self-Employed
What happens if you’re self-employed? Do you pay the employee tax or the employer tax?
The answer is that, under SECA (the Self-Employed Contributions Act) you pay both the employee portion and the employer portions of the tax. This means that if you’re a self-employed individual you’re paying 12.4% for Social Security Tax and 2.9% for Medicare Tax. And if you’re a high wage earner, you’ll still have to pay the 0.9% Additional Medicare Tax above your earnings threshold.
We know it’s not exactly fun to pay taxes as both employer and employee when you’re a self-employed worker. The good news is that the wage limit still applies to the Social Security Tax, so if you earn more than $168,600 in 2024 (for 2023 it is $160,200) your Social Security Tax is capped. Additionally, you can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income.
You’ll need to fill out SE Form 1040 to pay your self-employment taxes, not Form 941.
Find out more about what Form 1040-ES is (and how to use it to pay estimated tax payments.
Now Get Back to Work!
So how does it feel now that you’re a tax pro? They might have sounded complicated at first, but once you break FICA taxes down, it’s pretty straightforward and manageable.
FICA is just part of the journey that takes you from the gross pay your employees earn to the net pay that shows up in their paycheck. If you would like to learn more about the entire payroll tax process, please check out our step-by-step guide here.
Many business owners will use tools to help manage federal and state tax deductions in order to keep things simple. Read more in our primer on payroll software, including what it is and how it works.
Take a tour to see how easy payroll can be.
Erin Ellison is the former Content Marketing Manager for OnPay. She has more than 15 years of writing experience, is a former small business owner, and has managed payroll, scheduling, and HR for more than 75 employees. She lives and works in Atlanta.
Social Security Tax
The first part of FICA is the Social Security Tax. As an employer, you are required to withhold 6.2% of each employee’s taxable gross wages to cover this tax, up to a maximum wage base limit. Employers also have to pay this tax by matching each employee’s contribution dollar-for-dollar, up to the same maximum wage base limit.
For the 2024 tax year, the wage base limit is $168,600 (which is up from $160,200 in 2023).
Once an employee’s salary reaches that limit, they are no longer required to pay this tax. Therefore, the maximum contribution that an employee will make towards Social Security Tax in 2023 is:
$168,600 x 6.2% = $10,453.20
Employers also have to pay this tax by matching each employee’s contribution dollar-for-dollar, up to the same maximum wage base limit. As a result, the total social security tax rate is 12.4%. If someone is self-employed, they’ll generally be responsible for paying the entire 12.4% on their taxable income.
Next, let’s move onto the Medicare tax and the figures employers should be aware of.