Understanding the Federal Insurance Contributions Act (FICA) is foundational for employers and employees alike, whether you’re navigating the complex landscape of payroll compliance or negotiating pay.
Let’s go over everything employers need to know about FICA.
What Is FICA?
FICA directs a portion of each employee’s wages to Social Security and Medicare, two cornerstone federal programs. These deductions aren’t just a payroll requirement — they’re crucial to maintaining services that millions of Americans depend on.
Social Security provides essential financial support to retirees, individuals with disabilities, and families of deceased workers. Medicare programs offer vital health coverage mainly for, but not limited to, Americans aged 65 and older.
When an employer pays FICA taxes, as well as an employee, they’re contributing to the systems that provide an important financial safety net to the American workforce.
Who Pays FICA Taxes?
Employers and employees split the 15.3% tax rate 50/50. The resulting 7.65% rate includes 6.2% for Social Security and 1.45% for the Medicare portion. Any employee with earnings exceeding the minimum taxable amount will need to contribute to FICA, and employers are obligated to match these contributions.
Let’s consider an employee who earns $65,000 annually. The individual employee’s contribution would be 7.65% of their gross income, which equals $4,972.50. The employer matches this amount, making the total FICA contribution for that particular employee $9,945 for the year.
While understanding the mechanics of FICA contributions is important, every financial situation is unique. For personalized advice tailored to your circumstances, you may consider consulting a tax professional.
What Is the History of the Federal Insurance Contributions Act?
The history of FICA dates back nearly a century. Initiated by President Franklin D. Roosevelt in 1935, FICA was designed as a main financial mechanism to fund Social Security benefits. The tax took the weight off the federal government’s shoulders by pulling funds directly from American workers and their employers.
The FICA landscape expanded in 1965 when President Lyndon Johnson added Medicare to the mix. This addition widened the scope to include health care for retirees and individuals with specific health conditions, further cementing FICA’s role in safeguarding the welfare of Americans.
FICA has been reformed and fine-tuned to suit the evolving needs of the American population, and the tax rates and wage bases have shifted to accommodate changes in age demographics and the national average wage index.
FICA Today
Today, the FICA tax rate is noted on employee paychecks and is matched by the employer’s portion. It has, over time, become an important part of the American social welfare system.
Whether you’re a small business grappling with tax withholding or a high earner navigating the thresholds of additional Medicare tax rates, FICA remains a constant element in the payroll compliance landscape.
FICA’s historical journey demonstrates its significant role in the United States, and it’s not something to overlook when contemplating the intricacies of payroll tax and social security benefits.
What Is the Federal Income Tax and How Does FICA Differ?
The federal income tax was first passed in 1901 and officially ratified in 1913 — this is what we know as the 16th Amendment. During this time, farmers were bringing in low amounts of income for their products while paying high prices for manufactured goods.
Since its ratification, the federal income tax has become a pivotal part of a booming American economy, ensuring that essential services are properly funded and provided to citizens from coast to coast. With FICA in the mix, we ensure that every American has the proper resources to live a sustainable life.
Federal income tax applies to all income forms, including dividends and pensions, while FICA targets only earned income like salaries and bonuses. Federal income tax allows deductions such as charitable contributions, whereas FICA taxes are calculated on gross wages without deductions.
Federal income tax rates vary based on your filing status and are progressive, while FICA taxes are a flat rate unaffected by your filing status. Federal income tax scales with income, while FICA has a set contribution and benefit base, making it regressive in nature.
What Are the Benefits of FICA?
The most immediate benefit of FICA taxes is the financial underpinning they provide for Medicare and Social Security programs. Working Americans and their employers contribute to these essential services, ensuring they remain available to those in need.
Whether you’re entering retirement, in need of disability insurance, or encountering health care challenges, FICA ensures that you have a layer of financial support. Social Security benefits extend not just to retirees but also to disabled individuals, whereas Medicare offers critical health care coverage.
An often overlooked perk is the cross-generational benefit. The taxes the employee pays support current retirees, and when today’s earners reach retirement age, they’ll be supported by the subsequent generation of workers. “This is the benefit for an employee that is normally unrecognized,” notes Taylor Fike, Partner at Fike Advisors and Expert Contributor for Mosey. “If an employee decided to become self-employed in the same industry, they would be responsible for the full FICA taxes. When they work for a company, half of those expenses are covered by the employer.”
In addition to retirement and health care, Social Security benefits can provide some relief for long-term unemployed individuals, offering an extra layer of security when navigating life’s uncertainties.
How Do FICA Taxes Work?
Employees see a portion of their gross wages withheld each paycheck, matched by the employer’s portion, and funneled into specific trust funds. These funds are then accessed by the federal government to pay out Social Security and Medicare benefits to eligible individuals.
Tax Rates and Limits
When it comes to Social Security, the tax rate is 6.2%. However, this only applies up to a wage base limit, which was $160,200 in 2023. Earnings above this limit are not subject to the standard Social Security tax rate.
Medicare taxes are levied at a rate of 1.45%. Unlike the Social Security wage base, Medicare has no wage base limit — but if your employees cross certain income thresholds, they are subject to an additional Medicare tax of 0.90%.
For retirees or nondisabled Americans over 65, Social Security benefits are not a given. Eligibility relies on accumulating Social Security credits over working years. Securing 40 credits, generally achieved after a decade in the workforce, unlocks eligibility for benefits. Fike highlights that “Having a trustworthy company like Mosey handling your compliance management takes the pressure off of you and allows you to focus on other business ventures.”
How Can Business Calculate FICA Taxes?
Navigating FICA taxes doesn’t require an accounting degree — just a firm grasp of a few key principles. Here are the steps you need to follow to confirm you are doing it properly:
Collect Proper Tax Forms
Ensure you have the correct tax forms on hand. These may include W-2s for employees or 1099-MISC for contractors.
These forms may seem complicated. However, with the proper resources, you can easily ensure that you have accurately filled out your forms and tax returns.
Find Medicare Taxes
Next, determine the Medicare tax owed. The rate for both employees and employers is 1.45%. Apply these percentages to your employee’s gross wages to find the amount you’re contributing.
Find Social Security Taxes
Similarly, calculate the Social Security tax. The current rate is 6.2% for both parties. Again, self-employed individuals have a rate of 12.4%. Apply this percentage to employee gross pay to determine their portion and yours.
Look at Current Wage Limits
It’s crucial to keep an eye on wage base limits — they are subject to change. The Social Security Administration publishes this information and takes inflation into account. Keeping up to date on this limit ensures you and your employees are contributing the right amount.
Pay the IRS
Finally, submit your calculated taxes to the IRS. One way you can do this is by uploading your documents to the official IRS website. All you will need is an access code, your name, and your social security number.
Mosey for Tax Compliance
Having a well-rounded understanding of FICA taxes is one important facet of business compliance. Fortunately, Mosey is designed to be your go-to compliance platform. Our application consolidates your payroll tax, HR, and registration needs, reminding you when to manage ongoing compliance tasks for your business.
Mosey streamlines the process of setting up payroll tax accounts and even keeps you in the loop on year-to-year changes in legislation.
With Mosey on your side, you can ensure that you’re not just compliant but ahead of the curve.
