This article has been reviewed by tax expert Erica Gellerman, CPA.
FICA (Federal Insurance Contributions Act) taxes are social security and Medicare taxes that both employers and employees pay. Employers must withhold FICA taxes from employees’ wages, pay employer FICA taxes and report both the employee and employer shares to the IRS. For the 2019 tax year, FICA tax rates are 12.4% for social security, 2.9% for Medicare and a 0.9% Medicare surtax on highly paid employees. The rates remained the same for the 2020 tax year.
Businesses with employees have a number of responsibilities when it comes to small-business taxes. These include withholding income taxes and payroll taxes from your employees’ paychecks, paying employer taxes and reporting withheld amounts and employer taxes to the Internal Revenue Service (IRS).
FICA taxes are payroll taxes that fund social security and Medicare. Both employees and employers must contribute their fair share. It’s easy to get tripped up because you have to withhold the correct amount of FICA taxes from your employees’ paychecks, and you also have to pay the correct employer’s portion of the taxes.
FICA, which stands for Federal Insurance Contributions Act, is a federal law that regulates the payment of social security and Medicare taxes. FICA taxes fund the nation’s program of social security and Medicare benefits. People typically receive these benefits when they reach retirement age, but you have to pay taxes to fund the programs while you’re still working. Employers withhold the required payments from their employees’ wages and also contribute their own share. Collectively, the employee and employer contributions are called FICA taxes.
Businesses have to report FICA taxes on a quarterly basis using IRS Form 941. This form is for reporting information about your business, like the number of employees you have and the amounts you’ve withheld from their paychecks for income taxes, social security and Medicare. This form is also used to report the employer’s portion of social security and Medicare FICA taxes. Form 941 is due on the last day of the month following the end of each quarter (e.g. the form is due April 30 for the period covering January 1 to March 31).
Unless your FICA tax liability is less than $2,500 in a quarter, small businesses must use the IRS’s Electronic Federal Tax Payment System (EFTPS) to deposit FICA taxes. The IRS has a pay-as-you-go system for employment taxes, so you don’t just pay your taxes once per year. You have to periodically deposit the employer’s share of FICA taxes and the taxes that you’ve withheld from your employees’ paychecks.
Most businesses have to deposit their FICA taxes on a monthly or semiweekly basis:
If your FICA taxes and the amount of federal income taxes you’ve withheld from employees is $50,000 or less in a one-year period (July through June), you’re a monthly depositor. Under this schedule, tax deposits are due for each month on the 15th day of the following month. For example, January’s payment is due on February 15.
If your FICA taxes and the amount of federal income taxes you’ve withheld from employees is more than $50,000 in a one-year period (July through June), you’re a semiweekly depositor. Under this schedule, taxes for wages paid on Wednesday, Thursday or Friday are due the following Wednesday. Taxes for wages paid on Saturday, Sunday, Monday or Tuesday are due the following Friday.
Businesses that are less than one year old must follow a monthly depositor schedule. If a due date falls on a holiday or weekend, you have until the following business day to send the payment. To learn more about FICA tax deposit schedules, you can read IRS publication 15.
2019 and 2020 FICA tax rates
FICA taxes are calculated based on an individual’s gross annual wages. This includes salary, bonuses, commissions, tips, overtime pay, sick pay and premiums on some types of insurance.
It’s important to take note of the wage caps and thresholds so you correctly calculate your FICA tax responsibility and withhold the right amounts from your employees. Note that the main change between the 2019 and 2020 tax year is the wage cap for the social security tax; other than that the rates are set to remain the same at least through the 2020 tax year.
Social security wage ceiling
Employers and employees must each pay 6.2% social security tax on gross annual pay up to $132,900 for the 2019 tax year and up to $137,700 for 2020. This dollar limit is adjusted annually for inflation. Once your employees’ wages exceed this cap, you should no longer withhold social security taxes from their pay. You also don’t have to pay any employer taxes on wages above that amount.
There’s no wage cap for Medicare tax, which means that all of an employee’s annual wages are subject to this tax. Employees and employers must each contribute 1.45%.
Medicare surtax for highly paid employees
After the passage of the Affordable Care Act in 2010, employees who make over a certain amount of money each year must pay an additional Medicare surtax. Once an employee’s wages reach $200,000, you must start withholding 0.9% on any wages exceeding that threshold. There is no employer matching in this case; only employees pay the Medicare surtax.
Let’s say that you employed a sales executive in 2019 whose gross annual wages are $225,000. The executive is a single tax filer. Here’s how you would calculate FICA taxes for this employee.
The amount that you should withhold from the employee:
Social security taxes = $8,239.80 (this is calculated by multiplying 6.2% times $132,900. Wages above that amount aren’t subject to withholding for social security tax, but keep in mind this cap changed for the 2020 tax year).
Medicare taxes = $3,262.50 (this is calculated by multiplying 1.45% times $225,000. All of the employee’s wages are subject to withholding for Medicare tax).
Medicare surtax = $225 (this is calculated by multiplying 0.9% times $25,000. Only wages in excess of $200,000 are subject to withholding for the Medicare surtax).
Total taxes withheld from the employee = $11,727.30.
Employer FICA taxes that you have to pay:
Social security taxes of $8,239.80 (this is calculated by multiplying 6.2% times $132,900. You must pay social security tax on all wages up to $132,900).
Medicare taxes of $3,262.50 (this is calculated by multiplying 1.45% times $225,000. You must pay Medicare tax on all of the employee’s wages).
No Medicare surtax for employers.
Total employer FICA taxes = $11,502.30.
You’ll need to use IRS Form 941 to report the amount of money that you withhold from the employee and the amount of taxes you’re responsible for paying as an employer. Payments should be deposited using EFTPS.
Underpaying or overpaying FICA taxes
Sometimes, employers end up withholding too little or too much in FICA taxes. This could be due to a withholding error or the way the tax system is structured. For instance, employers are required to start withholding the Medicare surtax once the employee’s wages reach $200,000, without regard to the employee’s filing status or total household income. This can result in the employee underpaying or overpaying the Medicare surtax.
Let’s return to the employee in our previous example who earns $225,000 per year. Now assume that the employee is married and filing jointly, but the spouse doesn’t earn any wages. You must start deducting the Medicare surtax when the employee’s earnings reach $200,000, but the couple falls beneath the $250,000 threshold for married, joint filers. That means when they file their tax return, they will receive a refund for the surtax. Similarly, an employee might end up underpaying FICA taxes if their own wages fall below $200,000, but their joint income with a spouse is over the $250,000 threshold.
If an employee overpays, they should receive a refund when they file their tax return. If employees expect to underpay the Medicare surtax, they can make estimated tax payments throughout the year or ask for additional withholding on Form W-4.
FICA taxes vs. self-employment taxes (SECA)
Employers and employees have to pay FICA taxes to cover their social security and Medicare obligations. However, if the IRS considers you a self-employed business owner, you contribute to social security and Medicare by paying self-employment taxes (SECA taxes).
It can be a bit confusing to figure out if you’re a self-employed owner or an employee for tax purposes. Typically, business owners who actively work in a corporation are employees subject to withholding for income taxes and FICA taxes. The IRS usually considers the following business owners to be self-employed:
Owner of a sole proprietorship or independent contractor.
General partner in a partnership.
Member of a limited liability company (unless the LLC is taxed as a corporation).
The social security SECA tax is 12.4% on the first $132,900 of income ($137,700 for 2020), and the Medicare SECA tax is 2.9% on all income. Business income in excess of $200,000 is subject to the 0.9% Medicare surtax. These numbers should look familiar because SECA taxes essentially just add up the employer and employee share of FICA taxes.
Fortunately, self-employed business owners can deduct half of their SECA taxes on their income tax returns.
FICA taxes are federal taxes because social security and Medicare are federally administered benefit programs. However, several states have their own benefit programs that are paid for in part with employee withholding or employer payroll taxes. For example, New York State’s Family Leave Law is paid for with a 0.153% payroll deduction from employee wages.
We suggest consulting a tax professional or payroll provider who operates in your state to learn more about state-specific requirements.
Simplifying FICA tax compliance
It can be confusing to correctly calculate your FICA taxes and ensure that you’re in compliance with the IRS’s withholding and filing requirements. That’s why many small-business owners take the job off their plate and get payroll software or a professional employer organization (PEO) to do the work for them.
Payroll software, such as Gusto, will calculate income tax and FICA tax withholdings on your behalf every month. They will also calculate employer tax responsibilities, make tax deposits and file any required tax forms on your behalf.
PEOs serve as co-employers of your employees and handle payroll, benefits and taxes. You still retain control over your employees’ day-to-day responsibilities, but the PEO handles all HR and compliance tasks, including FICA tax administration.
A version of this article was first published on Fundera, a subsidiary of NerdWallet.