What is the FICA Tax and How Does It Work?

fica definition

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. You can calculate your FICA taxes by multiplying your gross wages by the current Social Security and Medicare tax rates. Higher-income taxpayers are required to pay higher Medicare taxes. In 2013, an additional Medicare tax was implemented, imposing an extra 0.9% of taxes on earnings over $200,000. Your employer also will withhold 1.45% of your earnings for Medicare.

The Social Security Administration uses your historical Social Security earnings record to determine your benefits under the social security program. The amount your employer sets aside for FICA is based on percentages set by the federal government. As for federal, state and local income taxes, the amount your employer withholds will usually depend upon the information you provided when filling out your W-4 Form or a similar state or local form. For the past couple of decades, however, FICA tax rates have remained consistent. For both of them, the current Social Security and Medicare tax rates are 6.2% and 1.45%, respectively. So each party – employee and employer – pays 7.65% of their income, for a total FICA contribution of 15.3%.

What Are FICA Taxes? Here’s What You Need To Know

You have to periodically deposit the employer’s share of FICA taxes and the taxes that you’ve withheld from your employees’ paychecks. When you look at your paycheck, you’ll see that your FICA taxes are taken out of your gross wages. Most employees will see 6.2% taken out for Social Security and 1.45% for Medicare, for a total of 7.65%. Employers match those amounts, for a total of 15.3% of the average salary. Similarly, because plans are not required to permit participants to take more than one distribution per month, plan sponsors may view the option of limiting the number of permissible withdrawals to a maximum of once per month as a sufficient constraint on the potential to manipulate the matching contribution rules.

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FICA Tax vs. Income Tax

If you continued to deduct Social Security tax above the maximum, you withheld too much FICA tax and must refund the money to the employee. If you cannot provide the full refund, the employee will have to file a claim with the IRS. Payments to your child under the age of 18 who is working in your business are not subject to Social Security and Medicare taxes if the business is a sole proprietorship or a partnership “in which each partner is a parent of the child,” the IRS notes. Payments to your spouse or your parent as an employee are subject to FICA taxes.

fica definition

While FICA taxes are automatically taken out of your paycheck as an employee, you’ll need to pay close attention if you change jobs or have more than one. You want to be sure you’re not paying more than you’re required to. And if you’re self-employed, you’ll need to use the IRS worksheets fica definition to ensure you’re paying the correct amounts. But there’s an Additional Medicare Tax that high-income individuals must pay. The Federal Insurance Contributions Act, or FICA, requires that wage earners contribute a portion of their earnings to fund the Social Security and Medicare programs.

What Is the Self-Employment Tax and How Do You Calculate It?

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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). Let’s return to the employee in our previous example who earns $225,000 per year.