What is FICA tax? Understanding FICA for small business

Small business owners are responsible for collecting and paying several federal and state employment taxes. One of these is the FICA tax, which actually covers two (and sometimes three) different payroll tax elements.

What is FICA tax?

FICA stands for Federal Insurance Contribution Act. It's the tax that helps fund the federal Social Security and Medicare programs.

Employers must pay FICA taxes, but they withhold half of the amount due from employee paychecks and pay the remainder out of their own pocket. The company then sends both the employer and employee portion to the IRS on either a semi-weekly or monthly basis, depending on the average size of the company's FICA tax deposits for the past year. Those deposits must be made via the Electronic Federal Tax Payments Sys. (EFTPS).

Each quarter, employers are required to send a quarterly payroll tax return, Form 941, to the IRS. On this form, the employer reconciles the amounts deducted from employee paychecks and the amount owed by the employer with the deposits made for that quarter. Form 941 is due on the last day of the month in the month following the end of the calendar quarter. For example, the first quarter payroll tax filing, which covers wages paid in January, February, and March, is due on April 30.

A full-service payroll provider will usually deposit FICA taxes on an employer's behalf.

How much are FICA taxes?

The FICA tax rate is 15.3% of employee wages, with 12.4% going toward Social Security and 2.9% going toward Medicare. Of that 15.3%, the employee and employer each pay 7.65%.

However, calculating the FICA tax is a little more complicated than simply multiplying the employee's wages by the FICA tax rate. The Social Security portion of FICA is capped at a set amount, called the Social Security wage base.

The Social Security wage base for wages paid during the 2023 calendar year is $160,200. This means if an employee earns $160,200 or less in 2023, the employer and employee each pay the full 7.65% (6.2% for FICA and 1.45% for Medicare) of the employee's wages toward FICA taxes. However, if the employee earns more than $160,200, the employee and employer each pay a maximum of 6.2% of $160,200 ($9,932.40) toward the Social Security portion of FICA. They'll also each pay 1.45% of total wages toward Medicare since there's no cap on the wages subject to the Medicare portion of FICA.

While individuals will only owe a maximum of $9,932.40 for FICA, the 1.45% for Medicare tax has no limit, so any amount above $160,200 in earnings will continue to be taxed to the employer and employee at 1.45% (total 2.9%).

There is an additional Medicare tax of .9% (total employee portion 2.35%) for individual earnings above $200,000 and $250,000 for joint filers
 

Additional Medicare taxes

In addition, employers are required to begin withholding an additional 0.9% Medicare surcharge once the employee's compensation exceeds $200,000. This is known as the Additional Medicare tax, and while employers are responsible for withholding and remitting payments, they don't have to make a matching payment.

Types of compensation subject to FICA

Federal payroll laws generally say that all employee wages are subject to FICA, and the definition of wages is broad. It includes almost every payment an employer makes to an employee for services, whether you call it wages, salary, commission, fees, or another name.

However, there are a few kinds of compensation that aren't subject to FICA tax, including:

• Wages paid after an employee's death.
• Wages paid to disabled workers after they're eligible for Social Security disability benefits
• Employee expense reimbursements (as long as the reimbursements are within the government per diem rate for meals, lodging, or mileage
• A child under 18 employed by their parent
• Employer contributions to a qualified retirement plan, such as a 401(k) plan
• Tip income (if less than $20 in a month)
• Payments made to independent contractors
• Workers' compensation payments

IRS Publication 15 includes a complete list of the special rules for various types of employee payments.

FICA vs. self-employment taxes

Self-employed people also pay into Social Security and Medicare, but they pay self-employment tax rather than FICA. The self-employment tax rate is 15.3% of net self-employment earnings—the same as the FICA rate split between employees and their employers. The Social Security wages base cap and additional Medicare tax still apply.