Paying taxes is a key responsibility of owning a business. While business owners need to be aware of several types of taxes, an important one is Federal Insurance Contributions Act (FICA) tax. FICA taxes are paid by both employers and employees to cover Social Security and Medicare. Because this is such a critical payroll tax, business owners need to know exactly what these FICA taxes entail, how to calculate them and when to pay them.
FICA is the federal income tax that funds Social Security and Medicare. The FICA tax rate is 15.3 percent of total earnings, half of which is withheld from an employee’s paycheck by their employer. In addition to the money they withhold, employers are responsible for paying the other half, so the FICA tax burden falls equally on the employee and the employer, at 7.65 percent of annual earnings.
Here’s a breakdown of what the FICA tax includes:
|Type of tax
|Social Security tax
|Additional Medicare tax
|Percentage of income
|Employee and employer
|Employee and employer
|Required withholding from employees’ paychecks
|Required employer match
|Maximum taxable income
FICA doesn’t apply to all wages. Here are some types of compensation that are not subject to FICA taxes:
While most employees must pay FICA taxes, there are some exceptions. Employees who have worked for the government since before 1984 may not have to pay Social Security taxes.
Calculating an employee’s and employer’s FICA tax contributions is straightforward: You multiply the employee’s gross pay by the tax rates for Social Security and Medicare. If your employee earned $1,000 this week and is required to contribute 6.2 percent to Social Security and 1.45 percent to Medicare, it would amount to $76.50. The employer would pay the other half.
Here’s a closer look at the math:
Social Security tax for the week = 6.2% of the employee’s gross wages, plus the match from the employer
Social Security tax for the week = $1,000 * 0.062 = $62. The employer must withhold this amount from the employee’s paycheck for tax filing, and the business must pay this amount in taxes as well.
Medicare tax for the week = 1.45% of the employee’s gross wages, plus the match from the employer
Medicare tax for the week = $1,000 * 0.0145 = $14.50. You must withhold this amount from the employee’s paycheck and pay this amount in taxes.
Total FICA tax for the week to be withheld from the employee’s paycheck = $62 + $14.50 = $76.50
Calculating the FICA tax can get cumbersome if you have tens or hundreds of employees. The good news is that the best payroll services and certified public accountants (CPAs) can calculate it for you.
“Once you establish a payroll policy and have it up and running, it’s rare for a small business to run into trouble with FICA taxes,” said Mike Slack, a manager at The Tax Institute at H&R Block. “The only thing that changes yearly with FICA is the maximum wage limit for Social Security.”
Those who are self-employed or independent contractors are required to pay both the employer and employee portions of Social Security, Medicare and Medicare surtax, which are collectively known as the self-employment tax. For 2023, self-employed workers and independent contractors pay a total of 15.3 percent in FICA taxes.
The IRS allows self-employed workers to claim 50 percent of the self-employment taxes paid as a deduction on their federal income taxes for the year.
Individuals registered as a sole proprietorship, limited liability company or partnership are on the hook for the self-employment tax. If you report your business taxes on Schedule C when filing your personal tax returns, you have to pay the self-employment tax.
Self-employed people have to pay FICA tax too, but it’s called the self-employment tax. It covers both the employee and the employer portions of Social Security and Medicare.
The Federal Insurance Contributions Act requires employers to withhold Social Security and Medicare taxes from employees’ wages. It is mandatory and ultimately the employer’s responsibility to fulfill. Small business owners who fail to collect, report or remit payroll taxes to the IRS face penalties and interest on the money they owe.
Small business owners may also face penalties if they misclassify workers as independent contractors. Under FICA rules, you don’t have to pay taxes on independent contractors, but if the IRS finds that your “independent contractors” should be treated as full-time employees, you could face penalties.
“The employer is the ultimate party responsible for FICA taxes,” Slack said. “Let’s say the corporation does not deposit those taxes over a certain period of time — the IRS can fine the owner.”
By using a payroll service to calculate, file and pay FICA taxes, you can streamline this often-cumbersome process for your business. Here are some of our picks for the best payroll services for handling FICA taxes:
Although taxes have earned a reputation as an incomprehensible, confusing beast of a business requirement, you now know that the math behind many of them is elementary. Nonetheless, payroll services can automate all of your tax-payment and tax-filing needs — and that’s the smart way to go even if you love math. Between what you’ve learned about FICA taxes and the infrastructure you can implement around them, tax time will be a breeze.
Max Freedman contributed to this article. The source interview was conducted for a previous version of this article.