Editor’s note: During COVID-19, small business owners can defer the employer portion of Social Security tax.
What is FICA tax?
FICA stands for Federal Insurance Contributions Act. It’s the taxes that help fund Social Security and Medicare benefits.
FICA taxes are an employer’s responsibility. But the employer splits the cost 50/50 with the employee by withholding half of the amount due from employees’ paychecks.
The employer periodically sends both the employer and employee portions of FICA to the IRS using the Electronic Federal Tax Payments System (EFTPS). Those deposits happen either semi-weekly or monthly, depending on the average size of their deposits for the past year. (All new business start out depositing monthly.)
Each quarter, employers must send a quarterly payroll tax report (Form 941) to the IRS. This form reconciles the amounts deducted from employee paychecks and amounts due from employers with the semi-weekly or monthly deposits.
Form 941 is due on the last day of the month after the end of each quarter. For example, the first quarter runs January through March, so you’re required to file Form 941 by April 30th for wages you paid during Q1.
How much is FICA tax?
Currently, the FICA tax rate is 15.3% of the employee’s gross pay: 12.4% for Social Security tax and 2.9% for Medicare tax.
Of that 15.3%, the employer and employee each pay 7.65%.
However, calculating FICA is a little more complicated than simply multiplying the employee’s gross income by the FICA tax rate. That’s because the Social Security portion of FICA is capped each year at a set amount, called the Social Security wage base.
For 2020, the Social Security wage base is $137,700, up from $132,900 in 2019.
This means, if an employee makes $137,700 or less in 2020, the employer and employee each pay 7.65% of the employee’s full salary toward FICA taxes. If the employee earns more than $137,700, then the Social Security portion of FICA (6.2% each from both the employer and employee) only applies to the first $137,700 of their wages.
There’s no wage base limit for the Medicare portion of FICA taxes. So both the employer and employee pay 1.45% of the employee’s salary, no matter how much the employee makes.
To illustrate, let’s say Carla owns Carla’s House Cleaning Co. As an employee of her S corporation, Carla pays herself a salary of $150,000. She also has one employee who earns $65,000 per year. Here’s how Carla would calculate FICA taxes for herself.
|Carla – Wages of $150,000||Employer Pays||Employee Pays|
|Social Security: 6.2% of $137,700||$8,537.40||$8,537.40|
|Medicare: 1.45% of $150,000||$2,175.00||$2,175.00|
And here’s how Carla would calculate FICA taxes for her employee:
|Employee – Wages of $65,000||Employer Pays||Employee Pays|
|Social Security: 6.2% of $65,000||$4,030.00||$4,030.00|
|Medicare: 1.45% of $65,000||$942.50||$942.50|
Additional Medicare Tax
In addition to the 2.9% Medicare tax, high-income earners have to pay a 0.9% additional Medicare tax if their income is above a certain threshold, depending on the employee’s filing status.
|Married filing jointly||$250,000|
|Married filing separately||$125,000|
|Single, Head of Household, or Qualifying Widow(er)||$200,000|
Business owners don’t have to pay a matching portion of the additional Medicare tax, but they’re required to withhold it if they make payments over $200,000 to an employee in a calendar year.
Payments not subject to FICA taxes
FICA doesn’t apply to all types of pay. Here are a few of the more common types of payments to employees that aren’t subject to FICA tax withholding:
- Wages paid after the worker’s death
- Wages paid to a disabled worker after becoming eligible for Social Security disability insurance benefits
- Employee expense reimbursements within the specific government rate for per diems or standard mileage
- Children under 18 employed by a parent
- Employer contributions to a qualified retirement or pension plan
- Tip income if less then $20 in a month
- Workers compensation payments
For a complete list of special rules for various types of payments, see the table in IRS Publication 15.
Here are some answers to a few common questions about FICA.
Is FICA Social Security?
Not exactly, but they are closely related. FICA taxes help fund many different types of Social Security benefits, including retirement, disability, and survivor benefits, as well as provide a portion of Medicare’s budget.
As employees work and pay FICA taxes, they earn credits for Social Security benefits. Today’s FICA taxes help pay for current retirees’ and other beneficiaries’ benefits. If there are any funds left over, they go into the Social Security trust funds to pay benefits in the future.
Is FICA a federal tax?
FICA is a federal tax. The federal government requires most businesses to withhold three taxes from employee paychecks: federal income taxes and the two FICA taxes. Employers also pay federal unemployment taxes (FUTA), but no portion of FUTA gets withheld from employee paychecks.
Depending on the state and local laws where your business has employees, you may also need to withhold or pay state and local income taxes, state unemployment taxes (SUTA), and disability taxes.
Is FICA deductible?
The employer portion of FICA is a deductible expense for businesses. The amounts withheld from an employee’s wages isn’t deductible. However, the salary or wages from which you withhold FICA taxes is a deductible business expense.
Business can deduct employee salary and the employer portion of FICA on their annual federal tax return.