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FICA taxes are social security and Medicare taxes that employers and employees need to pay. Businesses must withhold FICA taxes from employees’ wages, pay employer FICA taxes, and report both the employee and employer share to the IRS. 2019 FICA tax rates are 12.4% for social security, 2.9% for Medicare, and a 0.9% Medicare surtax on highly paid employees.
Businesses with employees have three primary responsibilities when it comes to small business taxes. You have to withhold income taxes and payroll taxes from your employees’ paychecks, pay employer taxes, and report withheld amounts and employer taxes to the Internal Revenue Service (IRS).
FICA taxes are payroll taxes that fund social security and Medicare. Both employees and employers must contribute their fair share. It’s easy to get tripped up because you have to withhold the correct amount of FICA taxes from your employees’ paychecks, and you also have to pay the correct employer’s portion of the taxes.
If you’re confused, read on to figure out how FICA taxes work, the FICA tax rates for 2019, and how to make sure you’re in full compliance.
FICA, which stands for Federal Insurance Contributions Act, is a federal law that regulates the payment of social security and Medicare taxes. FICA taxes fund the nation’s program of social security and Medicare benefits. People typically receive these benefits when they reach retirement age, but you have to pay taxes to fund the programs while you’re working. Employers withhold the required payments from their employees’ wages, and also contribute their own share. Collectively, the employee and employer contributions are called FICA taxes.
Businesses have to report FICA taxes on a quarterly basis using IRS Form 941. This form contains information about your business, the number of employees you have, and the amounts you’ve withheld from their paychecks for income taxes, social security, and Medicare. This form is also used to report the employer’s portion of social security and Medicare FICA taxes. Form 941 is due on the last day of the month following the end of each quarter (e.g. the form is due April 30 for the period covering January 1 to March 31).
Unless your FICA tax liability is less than $2,500 in a quarter, small businesses must use the IRS’s Electronic Federal Tax Payment System to deposit FICA taxes. The IRS has a pay-as-you-go system for employment taxes, which means you don’t just pay your taxes once per year. You have to periodically deposit the employer’s share of FICA taxes and the taxes that you’ve withheld from your employees’ paychecks.
Most businesses have to deposit their FICA taxes on a monthly or semiweekly basis:
Businesses that are less than one year old must follow a monthly depositor schedule. If a due date falls on a holiday or weekend, you have until the following business day to send the payment. To learn more about FICA tax deposit schedules, you can read IRS publication 15.
Social Security Tax
FICA taxes are calculated based on an individual’s gross annual wages. This includes salary, bonuses, commissions, tips, employee reimbursements, overtime pay, sick pay, and premiums on some types of insurance.
It’s important to take note of the wage caps and thresholds so you correctly calculate your FICA tax responsibility and withhold the right amounts from your employees.
Employers and employees must each pay 6.2% social security tax on gross annual pay up to $132,900. This dollar limit is adjusted annually for inflation. Once your employees’ wages exceed $132,900, you should no longer withhold social security taxes from their pay. You also don’t have to pay any employer taxes on wages above that amount.
There’s no wage cap for Medicare tax, which means that all of an employee’s annual wages are subject to this tax. Employees and employers must each contribute 1.45%.
After passage of the Affordable Care Act in 2010, employees who make over a certain amount of money each year must pay an additional Medicare surtax. Once an employee’s wages reach $200,000, you must start withholding 0.9% on any wages exceeding that threshold. There is no employer matching in this case; only employees pay the Medicare surtax.
Let’s say that you employ a sales executive whose gross annual wages are $225,000. The executive is a single tax filer. Here’s how you would calculate FICA taxes for this employee.
Amount that you should withhold from the employee:
Employer FICA taxes that you have to pay:
You’ll need to use IRS Form 941 to report the amount of money that you withhold from the employee and the amount of taxes you’re responsible for paying as an employer. Payments should be deposited using EFTPS.
Sometimes, employers end up withholding too little or too much in FICA taxes. This could be due to a withholding error or the way the tax system is structured. For instance, employers are required to start withholding the Medicare surtax once the employee’s wages reach $200,000, without regard to the employee’s filing status or total household income. This can result in the employee underpaying or overpaying the Medicare surtax.
Let’s return to the employee in our previous example who earns $225,000 per year. Now assume that the employee is married and filing jointly, but the spouse doesn’t earn any wages. You must start deducting the Medicare surtax when the employee’s earnings reach $200,000, but the couple falls beneath the $250,000 threshold for married, joint filers. That means when they file their tax return, they will receive a refund for the surtax. Similarly, an employee might end up underpaying FICA taxes if their own wages fall below $200,000, but their joint income with a spouse is over the $250,000 threshold.
If an employee overpays, they should receive a refund when they file their tax return. If employees expect to underpay the Medicare surtax, they can make estimated tax payments throughout the year or ask for additional withholding on Form W-4.
Employers and employees have to pay FICA taxes to cover their social security and Medicare obligations. However, if the IRS considers you a self-employed business owner, you contribute to social security and Medicare by paying self-employment taxes (SECA taxes).
It can be a bit confusing to figure out if you’re a self-employed owner or an employee for tax purposes. Typically, business owners who actively work in a corporation are employees subject to withholding for income taxes and FICA taxes. The IRS usually considers the following business owners to be self-employed:
The social security SECA tax is 12.4% on the first $132,900 of income, and the Medicare SECA tax is 2.9% on all income. Business income in excess of $200,000 is subject to the 0.9% Medicare surtax. These numbers should look familiar because SECA taxes essentially just add up the employer and employee share of FICA taxes.
Fortunately, self-employed business owners can deduct half of their SECA taxes on their income tax return.
FICA taxes are federal taxes because social security and Medicare are federally administered benefit programs. However, several states have their own benefit programs that are paid for in part with employee withholding or employer payroll taxes. For example, New York State’s Family Leave Law is paid for with a 0.153% payroll deduction from employee wages.
We suggest consulting a tax professional or payroll provider who operates in your state to learn more about state-specific requirements.
It can be confusing to correctly calculate your FICA taxes and ensure that you’re in compliance with the IRS’s withholding and filing requirements. That’s why many small business owners take the job off their plate and get payroll software or a professional employer organization (PEO) to do the work for them.
Payroll software, such as Gusto, will calculate income tax and FICA tax withholdings on your behalf every month. They will also calculate employer tax responsibilities, make tax deposits, and file any required tax forms on your behalf.
PEOs serve as co-employers of your employees and handle payroll, benefits, and taxes. You still retain control over your employees’ day-to-day responsibilities, but the PEO handles all HR and compliance tasks, including FICA tax administration.
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FICA taxes sound complicated, but the purpose is just to make sure that employers and employees both pay their fair share of social security and Medicare taxes. And if the IRS considers you a self-employed owner, rather than an employee, you’ll end up contributing your share through self-employment taxes.
If you’re an employer, the key is to make sure you withhold the right amounts of money from your employees’ wages and pay the employer share of FICA taxes on time. Small business owners who’d rather not spend too much time on FICA tax calculation should try a payroll provider or PEO.
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