When you’re a business owner, you are in charge of making sure your employees get paid. Legally paying your employees means withholding money for different employment taxes, like FICA tax. What is FICA, and how much is FICA tax?
What is FICA?
The Federal Insurance Contributions Act (FICA) tax is a mandatory payroll tax. If you have employees, you must deduct the FICA tax rate from your employees’ wages and pay the IRS. And, you need to contribute a matching amount per employee contribution.
How much is FICA tax?
FICA is made up of two separate taxes, Social Security and Medicare. How much is FICA? Altogether, you withhold the FICA percentage of 7.65% of your employees’ wages per paycheck. You also pay 7.65% of each employee’s wages, so you both contribute the same amount. All in all, the IRS receives 15.3% of each employee’s wages for FICA tax.
How much does Social Security take out?
The Social Security tax rate for 2017 is 6.2% of each employee’s wages. You also pay 6.2%. Taxes taken out for Social Security pay for federal programs that provide funding aid for retirement, the disabled, and survivors of a deceased worker.
For example, you pay your employee $1,000 per pay period. Out of that paycheck, $62 goes toward Social Security tax ($1,000 X 6.2%). You also contribute $62.
Social Security wage base limit
For 2018, the Social Security wage base limit is $128,400. You will only withhold and contribute money for Social Security tax until the employee earns $128,400.
After this wage base limit is reached, stop withholding the Social Security tax rate of 6.2% and do not make matching employer contributions.
If you accidentally withhold Social Security tax past the wage base limit, refund your employee(s).
How much is Medicare tax?
The Medicare tax percentage is 1.45% in 2017. Withhold 1.45% of each employee’s wages, and contribute the matching employer portion. Medicare taxes provide aid for things like healthcare and hospice care.
Let’s look at an example of how much is taken out for Medicare. Your employee is paid $1,000 per pay period. You would withhold $14.50 from their pay for Medicare tax ($1,000 X 1.45%). Also, contribute $14.50 for the matching employer portion.
Additional Medicare tax
There is no wage base limit for Medicare tax like Social Security tax. In fact, there’s an additional Medicare tax applied to employees who earn above $200,000. When an employee is paid over $200,000 (single), you must withhold 0.9% of their wages in addition to the 1.45%.
If the employee is married filing jointly, the extra Medicare tax applies to income over $250,000. And, if the employee is married filing separately, the additional Medicare tax applies to income over $125,000.
You do not need to match the additional Medicare tax. It is only for employees. But, you must keep paying the matching 1.45% portion.
FICA tax rate example
An employee might ask, “how much money is taken out of my paycheck?” If your employee is paid $1,000 per paycheck, you will withhold $76.50 per paycheck for FICA tax ($1,000 X 7.65%).
How to pay FICA payroll tax
Once you have withheld FICA payroll tax from employee wages and contributed the matching employer portion, you must deposit and report the taxes before the employment tax due dates. Your deposits are due after running payroll.
To deposit FICA taxes, you need to know whether you are a monthly or semiweekly depositor. Determine your depositing schedule annually before the beginning of each year. Your schedule depends on the total tax liability you reported on Form 941 during a 4-quarter lookback period.
You will be a monthly depositor if you reported $50,000 or less in taxes in the lookback period. If you are a new employer, you are a monthly depositor during your first year.
If you deposit taxes on a monthly basis, the money you withhold from employee wages for the whole month is due to the IRS by the 15th of the following month.
If your reported taxes are more than $50,000, you will make semiweekly FICA tax deposits. If you pay your employees on Wednesday, Thursday, or Friday, you must deposit taxes by the following Wednesday. If you pay your employees on Saturday, Sunday, Monday, or Tuesday, deposit taxes by the following Friday.
Reporting FICA income tax withholding
You are required to report FICA payroll tax withholding on Form 941 each quarter. Here are the due dates:
- Quarter 1: April 30
- Quarter 2: July 31
- Quarter 3: October 31
- Quarter 4: January 31
Compensation exempt from FICA tax
In general, most people are required to pay Social Security and Medicare taxes. With most types of compensation, you are required to withhold FICA tax.
However, there are some instances where an employee’s wages are exempt from Social Security and/or Medicare tax.
Here are some examples:
- Tip compensation: If the employee earned less than $20 per month in tips, their tip compensation is exempt from FICA tax.
- Partner: If your business is a partnership, there is no FICA tax for payments to partners.
- Deceased worker: The wages paid to the worker’s beneficiary the year after the worker’s death are exempt from FICA tax.
- Disabled worker: Wages paid the year after the worker qualified for disability insurance benefits are exempt if the worker didn’t perform a service for the employer during a payment period.
- Some nonresident aliens: Consult the IRS for a complete list of exempt nonresident aliens.
- Religious sects: If both the employee and employer are members of a recognized religious sect and work for a church or church-controlled nonprofit, there could be an exemption from FICA tax. To apply for exemption from FICA tax, file Form 4029.
Self-employment tax vs. FICA tax
Unless your business is incorporated, you are required to pay self-employment tax on your wages. Self-employment tax is made up of Social Security and Medicare taxes, just like FICA tax.
The self-employment tax rate is equal to the total FICA tax amount. Self-employment tax is 15.3% of your wages. Social Security tax is 12.4% and 2.9% goes to Medicare tax. As with FICA, the Social Security wage base limit is $128,400 for 2018. After you exceed this amount, only the 2.9% Medicare tax is applied.
There is an additional Medicare tax of 0.9% for self-employment wages above $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).
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This article has been updated from its original publish date of October 16, 2015.
This is not intended as legal advice; for more information, please click here.