As a taxpayer, it’s important to stay informed and up-to-date on a yearly basis. However, navigating the complexities of payroll compliance doesn’t need to be as complicated as it may seem. This is your definitive guide to understanding the FICA tax rate for 2024.
What Is FICA?
The Federal Insurance Contributions Act, commonly known as FICA, is a U.S. federal payroll tax that plays a critical role in funding Social Security and Medicare programs. All employee paychecks you issue will have two key deductions: 6.2% for Social Security tax and 1.45% for Medicare tax.
With this in mind, understanding employer match is key. Employers are required to match these percentages, resulting in a total contribution of 15.3%. With approximately 180 million American workers contributing to this system, FICA serves as a financial safety net for retirees, people with disabilities, and children.
Intricately linked to Social Security is the Old Age, Survivors, and Disability Insurance (OASDI) program — this is the core of what we commonly refer to as Social Security. Rooted in social insurance principles, OASDI delivers monthly benefits to cushion the financial blow that can accompany retirement, disability, or death.
What Are the FICA Rates and Limits for 2024?
Attention to detail is important when discussing FICA rates and limits, as they may change each calendar year. For 2024, the IRS has set the FICA limit at $160,200.
Social Security tax must be withheld at 6.2% until employees’ wages reach this limit. It’s noteworthy that the wage base limit for 2024 represents a significant increase — $13,200 higher than previous years, which is more than double past increases.
For employees earning more than $200,000 in 2024, the Additional Medicare Tax comes into play. This involves a 0.9% surtax on top of the regular withholding rates.
How Do Employers Calculate FICA Taxes?
Calculating FICA taxes is a responsibility that falls squarely on the shoulders of employers. The task generally involves paying both Social Security tax and Medicare tax.
Here’s your step-by-step guide:
- Identify Gross Wages: This number is the basis for FICA taxation.
- Apply Tax Rates: Find the right percentage of gross wages from the gross pay.
- Employer Matching: Employers match the Social Security Administration and Medicare contributions made by the employee, essentially doubling the rates mentioned above.
- Limit Checks: Ensure you’re aware of the annual thresholds. Once an employee’s taxable income crosses a certain limit, they may no longer be subject to the same tax rates or may be exempt entirely.
What To Keep in Mind When Withholding FICA Taxes?
The process of withholding FICA taxes can be more intricate than simple calculations. It’s far from rocket science, but it does require some attention to detail. Taylor Fike, Partner at Fike Advisors and Expert Contributor for Mosey, highlights that “The tax penalties for mistakes can be severe for employers, which makes this part of your business extremely important.”
Here’s what you need to keep an eye on:
Social Security Tax Limit
The Social Security wage base can change annually due to inflation or legislative changes. Revisit the tax rate and limit each year to ensure you are withholding the correct amount from employee’s paychecks.
Medicare Tax Limit
As mentioned above, Medicare tax has no income cap. What it does have is an additional Medicare tax. For incomes that exceed a predetermined limit, an extra 0.9% tax is levied. Check this limit each year to revisit your calculations if necessary.
What If Employees Exceed FICA Thresholds?
High-earning employees who surpass the Social Security benefits wage base will find that their earned income above this level is not subject to Social Security tax. However, you should not forget about FICA entirely. Medicare tax will continue to apply and may even include the additional Medicare tax if the income is significantly high.
The understanding of FICA tax withholding lies in attention to detail, vigilance for annual changes, and a thorough understanding of income thresholds. Keep these cornerstones in mind, and you’re well on your way to mastering FICA.
When Are Employees Exempt From FICA Taxes?
Though the FICA tax net is cast wide, not every employee pays FICA taxes. Thankfully, FICA exemptions are fairly straightforward.
The following employees are exempt from FICA taxes:
- Students With On-Campus Jobs: Call it a perk or a well-deserved break. Students employed in on-campus jobs are generally excused from FICA taxes.
- Nonresident Aliens: Foreign government employees, teachers from other countries, or nonresident aliens working in the U.S. are exempt from FICA tax withholdings.
- Faith-Based Earnings: In 2024, earnings from certain religious groups or churches could be exempt.
- Specific Foreign Employees: Depending on one’s particular circumstances, such as visa type or duration of work in the U.S., certain foreign workers may not qualify for FICA tax withholding.
- Self-Employed Individuals: While self-employed workers do not have an employer who withholds FICA from their paychecks, they must pay self-employment tax.
- Special Service Providers: Think newspaper deliverers, certain agricultural workers, and student workers. These people perform specific services that are usually not subject to FICA tax.
- Disability Exclusion: Some individuals with disability insurance may be excluded from having to pay Social Security taxes. It’s not an across-the-board rule but is available under specific conditions.
Why Do Employers Withhold FICA Taxes?
Navigating FICA taxes is essential for employers. Here’s a more concise look at the key aspects:
- $200,000 Threshold: Employers must start withholding the 0.9% Medicare tax rate when an employee’s annual compensation — taxable fringe benefits included — hits $200,000. Nontaxable fringe benefits are not part of this calculation.
- Earnings in Isolation: When assessing the $200,000 marker, employers consider only their wages, disregarding payments from other employers or an employee’s spouse. This withholding continues each pay period until year-end.
- Mismatch Scenarios: The $200,000 withholding initiation can lead to over- or under-withholding situations. Employees can make estimated tax payments or adjust withholding on Form W-4 to better align with their actual Medicare surtax liability.
Employers play a crucial role in FICA tax withholding, adhering to strict guidelines that sometimes make for tricky scenarios. For complex compensation structures, a deep understanding of IRS guidelines is a must. “While it feels like a large burden for your company, FICA taxes are a competitive advantage when hiring employees. When recruiting, mentioning that their FICA taxes are being paid by employers is something they would not get if they decide to be self-employed, instead,” notes Fike.
Can Employers Write Off FICA Taxes?
It’s essential to know that the employer portion of FICA taxes for Social Security and Medicare is classified as an excise tax.
This means it can usually be deducted as a business expense on their tax return as long as it’s an ordinary and necessary outlay in the conduct of business or income production.
However, it’s worth noting that the employer contribution to taxable wages for domestic workers doesn’t automatically qualify for this deduction. It must meet the criteria of being an ordinary and necessary business expense.
While FICA taxes might feel like a financial burden, the silver lining for employers is the potential tax deduction, subject to specific regulations. To ensure you’re correctly navigating the intricacies, it’s recommended to consult tax professionals for tailored advice.
How Can Employers Remain Compliant With Payroll Taxes?
When it comes to withholding taxes and keeping on the right side of the IRS, having the correct tools is more than half the battle. That’s where Mosey steps in — designed as a comprehensive tool, Mosey is engineered to manage all facets of your payroll compliance.
From setting up payroll accounts for withholding to unemployment insurance, workers’ compensation, and paid family leave, Mosey takes the guesswork out of the equation.
What sets Mosey apart is its ability to flag when you need to establish payroll accounts in new jurisdictions. Whether it’s a state or local-level compliance, Mosey provides a roadmap, making sure you don’t miss any essential information pertaining to your business.
Beyond payroll taxes, Mosey extends its functionality to other realms of compliance like insurance and HR compliance, ensuring you remain organized and compliant across the board.
The Mosey Advantage
Understanding federal income tax withholding is an important component of savvy business operations. Yet, you don’t have to navigate the complex world of compliance unassisted. Mosey offers an all-in-one solution that simplifies the compliance process.
It’s time to give Mosey a try and experience streamlined tax compliance like never before.
