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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.
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 and includes two taxes: 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.
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 2023 tax rates.
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 2022 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 $160,200 in 2023 (for 2022 it is $147,000) 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 2023 tax year, the wage base limit is $160,200 (which is up from $147,000 in 2022).
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:
$160,200 x 6.2% = $9932.40
Next, let’s move onto the Medicare tax and the figures employers should be aware of.