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What Does FICA Tax Include?

When you own a business, you are responsible for making tax payments to the IRS. If you have employees, you must handle FICA tax. What does FICA tax include, and what are FICA taxes used for, anyway? Read on to find out.

What does FICA tax include?

The Federal Insurance Contribution Act (FICA) tax is a mandatory employment tax both employees and employers pay. FICA includes Social Security and Medicare taxes.

When you have employees, you withhold the employee portion of FICA from each paycheck. And, you make a matching contribution. You and your employees pay the Social Security and the Medicare tax rates.

Altogether, you withhold 7.65% of your employees’ wages for FICA. And, you pay a matching 7.65% of each employee’s wages to the IRS. Both employee and employer portions make up 15.3% of the employee’s wages.

Social Security tax rate

The Social Security tax rate is 6.2%. Withhold 6.2% of each employee’s gross wages to contribute to Social Security, and pay the matching 6.2% employer contribution.

There is a Social Security wage base limit, meaning after a certain amount you don’t need to withhold. You will only withhold 6.2% of each employee’s wages up to $137,700 for 2020 and $132,900 in 2019. When the employee reaches the annual limit, you will stop withholding Social Security tax from their paychecks. Stop contributing the matching employer portion after the wage base limit, also.

Medicare tax rate

The Medicare tax rate is 1.45%. That means 1.45% of withheld wages from each employee paycheck go toward Medicare taxes. And, you must contribute the matching 1.45% for each employee to Medicare.

There is no Medicare taxable wage threshold. In fact, there is an additional Medicare tax withholding when an employee is paid above $200,000. After $200,000, you will withhold 1.45% and an additional 0.9% of their wages. There is no employer contribution for the additional Medicare tax rate, so you do not pay the 0.9% after the employee earns $200,000.

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FICA contribution example

To help you run payroll, take a look at this example of FICA withholding and payment matching.

Let’s say your employee is paid $2,000 each pay period. You must withhold 6.2% of their wages for Social Security tax and 1.45% for Medicare tax.

Here is the amount you would withhold from the employee’s paycheck for Social Security tax:

Employee’s wages = $2,000

$2,000 X 6.2%

$2,000 X 0.062 = $124

Social Security tax = $124

Since the employer withholding is $124 from the employee’s pay, you also contribute $124. A total of $248 goes toward Social Security tax.

Here is the amount you would withhold from the employee’s paycheck for Medicare tax:

Employee’s wages = $2,000

$2,000 X 1.45%

$2,000 X 0.0145 = $29

Medicare tax = $29

Withhold $29 from the employee’s pay and pay a matching portion of $29. A total of $58 goes toward Medicare tax.

The total FICA amount you must deposit is $306.

You must use this method to figure out FICA taxes for each of your employees.

What do FICA taxes pay for?

FICA includes taxes to pay for federal programs that provide benefits to qualified individuals.

Social Security taxes are meant to benefit employees after retirement, those who are disabled, and survivors of a worker who has died. The money is distributed by the Social Security Administration.

Medicare tax is distributed by the Centers for Medicare & Medicaid Services, a branch of the Department of Health and Human Services (HHS). The taxes go to beneficiaries (qualifying retirees and the disabled) to pay for healthcare, hospice care, and hospital insurance.

Need help calculating FICA deductions? Patriot’s online payroll services do the work for you. We offer free setup and support. Try it for free today!   

This article was updated from its original publish date of 05/15/2012.

This is not intended as legal advice; for more information, please click here.

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