What is FICA Tax and How is it Calculated? Financial Security for All

It is the tax that funds Social Security and Medicare, two Accounting Security important social insurance programs that most Americans will rely on in old age or if they become disabled. Employees pay 6.2% of their gross wages towards Social Security, up to a specific limit. This means that wages earned beyond this threshold are not subject to Social Security tax. FICA (Federal Insurance Contributions Act) is the law that requires payroll taxes to fund Social Security and Medicare programs in the United States. In addition to FICA taxes, there’s a wide array of other payroll taxes that businesses in the United States must pay attention to every pay period. It can be difficult to keep track of your tax liability, especially when dealing with federal taxes as confusing as FICA.

Benefits & HR

If you look more closely, you’ll likely notice a slew of acronyms that, without any explanation, lowered your take-home pay. For most workers, one of the biggest culprits is called «OASDI.» FICA requires Accountable Institutions to develop and implement a Risk Management and Compliance Programme (RMCP) that documents the risk-based approach of the institution’s FICA compliance strategy.

What is the FICA Tax and How Does It Work?

• However, the credit varies based on individual state regulations and other factors.
• This form reconciles the amounts deducted from employee paychecks and amounts due from employers with the semi-weekly or monthly deposits.
• According to the IRS, FICA taxes include old-age, survivors and disability insurance taxes (Social Security), and hospital insurance taxes (Medicare).
• This is the portion of FICA taxes that employees pay directly from their wages.
• The FICA rate in 2024 remains consistent with the FICA rate in 2023 at 7.65%.

Nobody likes having money withheld from their paycheck, especially for something as yucky as taxes. But if you’re an American and an employee (or an employer), chances are you’re one of the lucky millions required to pay into FICA. Your payroll FICA deduction isn’t the only thing that changes. Although it’s far less frequent, the retirement age has also increased. At one time, everyone was eligible to apply for Social Security payments at 65. Now, you’ll probably need to be 67 to qualify for full retirement benefits.

FICA Exemptions: Who’s Off the Hook?

The Social Security tax ceases to apply for earnings beyond the Social Security maximum for 2018, which is $128,000. For example, if an employee’s gross monthly wages are $2,000, then $306 is owed to the IRS (2,000 x 15.3%) under today’s FICA tax rates. Since FICA taxes are a shared retained earnings responsibility, the employee pays half of that total ($153) while their employer pays the other half. Of that total amount, $248 (2000 x 12.4%) goes to Social Security and $58 (2000 x 2.9%) goes to Medicare. As we mentioned above, FICA taxes go to funding two different programs—Social Security and Medicare. For 2023, the Social Security tax rate is 6.2% of an employee’s wages, and the Medicare tax rate is 1.45%.

Is there a wage limit for FICA taxes?

• Skynova has a wide selection of software that can help simplify your business’s accounting process.
• Remember, if you’re self-employed, you’ll need to use the IRS worksheets to ensure you’re paying the correct amounts.
• The total Medicare tax rate of 2.9% is also split between employee and employer.
• It is important to understand the FICA meaning and how it applies to your paycheck for managing your finances effectively.
• Failure to properly withhold and deposit payroll taxes can result in significant penalties.
• Your employer also will withhold 1.45% of your earnings for Medicare.

Check Estimated Taxes and Publication 505, Tax Withholding and Estimated Tax for more information. We’ve already explored FUTA, which plays a vital role in the unemployment insurance system at the federal level. However, each state also has its own unemployment tax and program, known as SUTA (State Unemployment Tax Act). At Employers Resource, we provide payroll processing and tax services to make payroll simple and stress-free for you, freeing you up to focus on higher-impact tasks for your business. We handle complex calculations, filings, and deadlines, ensuring your business remains compliant and avoids costly penalties. Form W-9 doesn’t usually result in income taxes withheld, but there is an exception.

In 1935, the United States Congress passed the Federal Insurance Contributions Act, known as FICA. Its purpose was to collect contributions to fund the new Social Security program established by the administration of President Franklin fica meaning D. Roosevelt in the same year. If you make $220,000, your FICA tax will be calculated as follows. It is important to understand the FICA meaning and how it applies to your paycheck for managing your finances effectively.