What Is a FICA Tax?

The Federal Insurance Contributions Act (FICA) tax is a payroll tax in the United States that helps fund two major social insurance programs: Social Security and Medicare. Here’s everything you need to know about the FICA tax:

Social Security Tax:

1. The Social Security tax is a component of the FICA tax that funds the Social Security program.
2. The current Social Security tax rate is 12.4% of an employee’s wages, with 6.2% paid by the employee and 6.2% paid by the employer.
3. The Social Security tax applies to earned income up to a certain threshold, known as the Social Security wage base. The wage base is adjusted annually. Any income above this threshold is not subject to the Social Security tax.
4. Self-employed individuals pay the full 12.4% Social Security tax, as they are considered both the employer and the employee.

Medicare Tax:

1. The Medicare tax is the other component of the FICA tax and supports the Medicare program.
2. The current Medicare tax rate is 2.9% of an employee’s wages, with 1.45% paid by the employee and 1.45% paid by the employer.
3. Unlike the Social Security tax, there is no wage base limit for the Medicare tax. All earned income is subject to the Medicare tax.
4. Additionally, high-income individuals may be subject to an Additional Medicare Tax of 0.9% on wages exceeding certain income thresholds. This tax only applies to employees and is not matched by employers.

Self-Employment Tax:

1. Self-employed individuals are responsible for paying both the employer and employee portions of the FICA tax, known as the self-employment tax.
2. The self-employment tax rate is currently 15.3%, which represents the combined Social Security and Medicare tax rates.
3. However, self-employed individuals can deduct the employer portion of the self-employment tax when calculating their adjusted gross income on their personal tax returns.

Reporting and Payment:

1. Employers are responsible for withholding the employee’s portion of the FICA tax from their wages and remitting both the employee and employer portions to the IRS.
2. Employers must report FICA taxes on Form 941 (Employer’s Quarterly Federal Tax Return) and file it with the IRS on a quarterly basis.
3. Self-employed individuals report and pay their self-employment tax using Schedule SE (Self-Employment Tax) when filing their annual income tax return (Form 1040).

Benefits of FICA Tax:

1. The FICA tax funds important social insurance programs, including Social Security and Medicare, which provide retirement, disability, survivor benefits, and healthcare coverage for eligible individuals and their families.
2. By contributing to the FICA tax, workers earn credits that count toward future eligibility for Social Security retirement benefits and Medicare coverage.

Understanding the FICA tax is crucial for both employees and employers to ensure compliance with tax obligations. It’s recommended to consult with Matthew Jennings, JD, MBA, EA, RFC®, CEP®, CES™, aka Tax King Matt or refer to IRS publications for specific guidance related to your situation.