You’re familiar with employee taxes if you work in the United States. Also known as FICA, these are taxes withheld from your paycheck to fund Social Security and Medicare benefits.
FICA tax withholding is based on information you provide to your employer when you fill out a W-4 form.
Taxes for Social Security and Medicare
FICA, or the Federal Insurance Contributions Act, requires all wage earners to pay taxes that fund Social Security and Medicare. The tax is automatically deducted from a paycheck and matched by employers. As an HR manager, it’s essential to understand the mechanics of FICA and how it impacts your employees.
The taxes are split in half, with the worker paying 6.2% and the employer contributing a matching amount. These funds go into the Social Security and Medicare trusts, from which money is drawn to cover benefits for retirees, survivors, disabled individuals, and children of deceased workers. As of 2023, these payroll taxes account for 89 percent of the inflows into the programs.
A wage base limit for the Social Security portion of FICA means that wages above a specific threshold will not be subject to the 6.2% tax. There is no wage limit for the Medicare part of FICA, but high-earners may face an additional 0.9% Medicare surtax.
The IRS sets these tax rates annually, with adjustments for inflation. As a result, the FICA contributions you collect and pay as an employer might change yearly. FICA is also responsible for collecting and paying unemployment insurance, a program that assists unemployed workers searching for new jobs. Unlike the other types of payroll taxes collected, these payments are not made by individual taxpayers but by the employer on behalf of its employees.
Taxes for Employees
All employees are subject to FICA payroll taxes regardless of their job or industry. These mandatory employment taxes are withheld from each paycheck and sent to the IRS every pay period. They contribute toward the Social Security and Medicare programs. The two payroll tax rates—12.4% for employee Social Security and 1.45% for employer Medicare—total 15.3% of taxable wages.
The amounts withheld from each paycheck depend on the information provided by each employee on their W-4 Form. The forms list each employee’s marital status, number of dependents, and tax credits and deductions. This helps employers determine how much to set aside for each pay period.
Additional Medicare taxes are withheld when an employee’s gross taxable wage exceeds certain thresholds. This applies to compensation of more than $250,000 for individuals and $200,000 for married couples. The employer is also liable for an employer Medicare surtax of 0.9 percent on payment above these limits.
Employers are responsible for depositing and reporting the federal taxes they withhold from employee paychecks. They typically file FICA taxes semi-weekly or monthly with the IRS, depending on their total tax liability for the previous four quarters. If they miss these deadlines, they could face hefty fines.
Taxes for Employers
FICA payroll taxes, which appear on paycheck stubs as deductions for Social Security and Medicare, represent the second largest source of federal revenues. Employers must pay their portion of the FICA tax and their employees ‘ share of the payroll tax. These taxes comprise over half the total income tax withheld from employee wages.
Employers typically deposit FICA payroll taxes with the IRS after each paycheck. This is done by submitting Form 941, reconciling the employer’s contribution to FICA taxes and the amounts deducted from employee paychecks. This report is filed monthly or semi-weekly, depending on the total employment tax liability reported for four quarters.
In addition to FICA payroll taxes, employers must collect federal and state income taxes, local employment taxes, workers’ compensation, and employee benefit contributions. These taxes are used to pay for various government spending and specific programs, including local infrastructure, social welfare benefits, first responders, and more.
As a business owner, it is essential to keep in mind that paying payroll taxes ensures your employees will have the documentation necessary to prove their income if they need to apply for credit, housing, or other income-sensitive applications. In addition, keeping accurate records of payroll tax withholding provides a valuable audit defense for your business.
Taxes for Self-Employed
Unlike employees who have payroll tax withholding from their paychecks, individuals who work for themselves don’t have an employer to share the responsibility of paying Social Security and Medicare taxes. As a result, self-employed taxpayers pay their complete 15.3% FICA tax on their net earnings. (Net earnings are your income minus expenses). Additionally, since 2013, the IRS has imposed an additional 0.9 percent Medicare surcharge tax on high-earners whose wages, compensation, and self-employment exceed $200,000.
Many workers today work as W-2 employees for one company and as independent contractors or freelancers. This is especially common with people who do ride-sharing for companies like Uber and sell jewelry on platforms such as Etsy. For these individuals, it is essential to understand their tax situation and responsibilities because both sides of FICA taxes may be withheld from their earnings.
In addition to Social Security and Medicare taxes, there are two other federal payroll taxes that every worker must pay: FUTA and SECA. The FUTA tax, the Federal Unemployment Tax Act, funds a program that provides unemployment benefits to workers who lose their jobs. Unlike FICA taxes, employers do not contribute to FUTA. Instead, FUTA is paid solely by businesses. Similarly, the SECA tax, which stands for Self-Employment Contributions Act, is produced solely by self-employed individuals and their businesses.
