FICA Tax, or Federal Insurance Contributions Act Tax, is a payroll tax that is imposed on both employees and employers to fund Social Security and Medicare programs in the United States. Understanding the key aspects of FICA tax, including how to calculate it, file it, and the exceptions to it, is crucial for both employees and employers.
What is FICA Tax?
FICA tax is made up of two separate taxes: the Social Security tax and the Medicare tax. Social Security tax funds the Social Security program, which provides benefits to retirees, disabled individuals, and the families of deceased workers. Medicare tax funds the Medicare program, which provides healthcare benefits to people over the age of 65 and individuals with certain disabilities.
Social Security Tax: The Social Security tax rate is 12.4% of an employee's taxable earnings, with half (6.2%) paid by the employee and half paid by the employer. For the tax year 2023, the Social Security tax applies to the first $142,800 of an employee's taxable earnings.
Medicare Tax: The Medicare tax rate is 2.9% of an employee's taxable earnings, with half (1.45%) paid by the employee and half paid by the employer. There is no salary cap for the Medicare tax.
How to Calculate FICA Tax?
To calculate FICA tax, you need to multiply an employee's taxable earnings by the Social Security and Medicare tax rates. For example, if an employee earns $50,000, their Social Security tax would be $3,100 ($50,000 x .062), and their Medicare tax would be $725 ($50,000 x .0145).
Additional Medicare Tax: For employees earning more than $200,000 per year, an additional 0.9% Medicare tax applies to the portion of their taxable earnings that exceeds $200,000. This tax is only paid by the employee and not by the employer.
Exceptions to FICA Tax: Some types of income are exempt from FICA tax, including certain types of disability benefits, worker's compensation, and certain kinds of payments to government employees. Additionally, some types of employers, such as churches and other religious organizations, may be exempt from paying the employer portion of the FICA tax.
For Self-Employed Individuals
If you are self-employed, you are responsible for paying both the employee and employer portions of the FICA tax, but at a slightly lower rate. The self-employed individual rate for Social Security tax is 12.4%, but you are only responsible for paying the full amount, rather than having half paid by an employer.
Filing FICA Tax
Employers are responsible for withholding FICA tax from their employee's paychecks and paying the employer portion of the tax to the IRS. Employers must also file Form 941, the Employer's Quarterly Federal Tax Return, to report and pay the FICA tax. Self-employed individuals must file Schedule SE, Self-Employment Tax, with their tax return to report and pay their FICA tax.
In conclusion, the FICA tax is an important component of the Social Security and Medicare programs in the United States, and it is crucial for both employees and employers to understand its key aspects of it. Whether you are an employer responsible for withholding and paying FICA tax, or an employee responsible for paying your portion of the tax, it is important to accurately calculate and file FICA tax to ensure that the necessary funds are being collected to support these programs.