What Is FICA Tax? A Guide for the New Employer

FICA stands for the Federal Insurance Contributions Act and is a tax that is deducted from every paycheck. This tax funds both Social Security and Medicare programs that provide for retired persons, those with disabilities, and children. This guide explains the FICA tax and what it means for those who are new to having employees. It will explore who pays for it and how it works. 

What Is FICA (Federal Insurance Contributions Act)?

FICA is a payroll tax that was established in 1935 to fund the Social Security and Medicare programs. Consequently, the law requires employees and employers to share the tax burden under this program. Moreover, the taxes you pay are tied to your nine-digit Social Security number. As a result, when you pay taxes, you earn credits that will lead to the ability to have an income when you are eligible for retirement.

The money deducted from your paycheck is divided into two portions. On one hand, one portion is put into your Social Security Account. On the other hand, the other portion goes to Medicare. This is a program that provides Federally-funded health insurance for those who are 65 or older. It will also provide coverage for some younger people who have disabilities or who are in end-stage renal disease.

Total FICA taxes for 2024 are a total of 15.3%. Both the employer and employee pay half of the tax burden. In detail, FICA tax is split with 6.2% going to Social Security and 1.45% going to Medicare. Moreover, the rates do not change according to how much you make. Everyone pays the same percentage. Finally, these percentages are reviewed annually by Congress and adjusted based on changes in consumer prices.

What Are My FICA Tax Responsibilities as an Employer?

Taking FICA taxes out of an employee’s paycheck and transferring them to the IRS is the responsibility of the employer. When you hire a new employee, you need to have them fill out a form W-4. This form is the Employee’s Withholding Certificate. This certificate tells you and the IRS about the employee’s credits and about any additional amounts they might want to contribute. This form is filed with the IRS. You can go to the IRS website to find FICA payroll forms

How to Calculate FICA Tax for Your Employees

Calculating how much FICA taxes to withhold from your employee’s pay and the portion you need to pay is simple. All you need to do is multiply the employee’s gross income by 6.2%, which gives you the amount you will need to submit to Social Security. You can find the amount needed for Medicare by multiplying their gross income by 1.45%. For your portion of the taxes, you will need to sum all of the amounts you owe for each of your employees. Once you have the numbers together, you will need to submit the form that applies to you, according to Publication 15, with your payment. 

Here is an example of an employee that makes under $168,000. 

Gross wages ($1,500 for the current month) X 0.0765 = $114.75 FICA withholding for the month

You will also have to pay $114.75 for a total tax liability of $229.50

For an employee who makes over $200,000, the calculation will look like this for every paycheck. Let’s say the employee earns $10,000 twice a month or $260,000 per year. 

For the first part of the year, the calculation looks like that for any other employee. 

Gross wages ($10,000 per pay period) X 0.0765 = $765.00 FICA withholding for the month withheld from the employee. When you add the employer portion, this is $1,530. 

Once the employee reaches $168,000, you no longer have to withhold Social Security. For any amount over $168,000 to $200,000, you withhold the regular Medicare tax rate of $1.45%. Any pay after the employee reaches $200,000 is taxed at 0.9%. 

FICA Limits and Thresholds

Everyone who works must pay this tax, even if you are self-employed. However, those who make over a certain threshold per year do not have to pay it. For 2024, those who earn $168,200 do not have to pay FICA tax above the tax that would be owed above that amount. 

By comparison, there is no upper limit where Medicare taxes are not taken out. All wages are subject to Medicare tax, but taxes above $200,000 are categorized differently. Anything above $200,000 is considered “additional” Medicare tax. It is taxed at a lower rate, and there is no employer match required for additional tax. The base Medicare tax rate for up to $200,000 is the same 1.45% everyone else pays. Additional wages over $200,000 are taxed at 0.9%. It might be noted that the limit is $200,000 for single filers and $250,000 for joint filers. 

Are FICA Taxes Deductible?

The employer’s share of FICA taxes is counted as a normal business expense and can be deducted from your gross revenue. The employee cannot deduct the amount they paid for FICA from their taxes because they will receive it as a benefit when they retire. 

Paying FICA taxes seems to be a straightforward process, but there are some common pitfalls of which you must be aware. For instance, certain types of pay or benefits are not taxed under FICA. These include: 

  • Wages paid to disabled workers after they are eligible for Social Security
  • Reimbursement of employee expenses
  • Employ contributions to a retirement or pension plan
  • Tips earned if they are under $20 per month

There are other exemptions and special circumstances that might apply to you, so be sure to consult with a professional to make sure you understand them. 

What Are FICA Reporting Requirements?

Throughout the year, you will withhold the required portion of the employee’s pay. You will need to determine your required payment schedule to the IRS using Publication 15. Then, you will need to submit forms 941, 944, 945, or 943 with the payment according to the schedule.

Most businesses can expect to pay FICA taxes to the IRS on a quarterly schedule. Accurate payroll processing is necessary to ensure you pay the correct amount from your employee and your portion. At the end of the tax year, you will need to provide your employees with a form W-2 that shows the contributions they paid and from you. One of the most common reporting mistakes is not using the correct filing schedule for your business, so make sure you understand how Publication 15 applies to you. 

Common FICA Tax Mistakes to Avoid

Failing to report taxes accurately and on time can mean hefty fines from the IRS. Fortunately, the IRS has provided guidelines on how to correct common reporting errors. 

Correcting most errors involves filing an amended version of the form. Failure to report on time can cost you as much as 10% of your unpaid liabilities if only 15 days late. Although the IRS has remedies to help you resolve your employer tax obligations, some unresolved issues can lead to criminal prosecution and up to five years in prison. 

Closing Thoughts on FICA Taxes

Employers have a responsibility to file FICA taxes accurately and on time or face stiff penalties. Most employers pass on the responsibility for reporting to tax preparers, but there are scams out there. You need to make sure your payroll preparer is reputable and knowledgeable about FICA tax rules. Otherwise, you could end up paying the penalty for their mistakes. Before you hire someone to handle your payroll, ask them about licenses, certifications, and if they are bonded.

About the Author

Miguel Alexander Centeno

Miguel Alexander Centeno is an author, speaker, and tax leader at Tax Hack Accounting Group. A former Big 4 tax manager, he represents taxpayers in all matters before the IRS, including the U.S. Tax Court. He has been quoted in the Wall Street Journal, Fox Business, and MSNBC on tax related articles and has testified before the U.S. House of Representatives as a part of hearings for the Tax Cuts and Jobs Act. A father of three, Miguel is an avid acoustic guitar player, gravel cyclist and once-a-week yogi.
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