As a small business owner, running payroll means having to understand all kinds of seemingly random acronyms like FICA. 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 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 and includes two taxes: Social Security Tax and Medicare Tax. These mandatory taxes cover Social Security program funding and feed the federal government’s Medicare trust fund.
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 2021 tax rates.
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. For the 2021 tax year, the wage base limit is $142,800.
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 2021 is:
Employers also have to pay this tax by matching each employee’s contribution dollar-for-dollar, up to the same maximum wage base limit.
The second half of FICA is the Medicare Tax. Employers are required to withhold 1.45% of each employee’s taxable gross 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 2021 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
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.
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.
What happens if you’re self-employed? Do you pay the employee tax or the employer tax?
The answer is that you pay both the employee and the employer tax, which means that 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 self-employed. The good news is that that the wage limit still applies to the Social Security Tax, so if you earn more than $142,800 in 2021, 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.
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.