FICA Tax: What is FICA Tax, Rates, Exemptions and Calculations

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Sanders suggests keeping the existing 6.2% rate for the Social Security tax, essentially reimposing the total 7.65% in FICA for high-income earners. SHRM Members enjoy unlimited access to articles and exclusive member resources. As mentioned earlier, there is a 1.45% FICA tax that helps to fund the Medicare system. Employers are also required to make this contribution, bringing the total funding to 2.9% of all wages earned.

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• Fortunately, self-employed business owners can deduct half of their SECA taxes on their income tax returns.
• The Social Security wage base for self-employed individuals in 2020 will also be $137,700.
• In this example, you would deduct $29 from this employee’s gross pay for Medicare tax.
• At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.
• 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.
• These forms provide the IRS with information about the employer’s total payroll, FICA tax liability, and tax payments made during the reporting period.
• Such a move could increase FICA withholding for high-income individuals by an even greater amount than the Sanders proposal, and it would add a progressive element to the FICA tax structure for the first time.

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. 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. 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.

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Thus, the total Medicare tax payment financial statements 101 that you would submit to the IRS for this employee (for this pay period) would be $58. Similar to Social Security taxes, the employer will have to match the employee’s share of 1.45% equally. In this example, you would deduct $124 from this employee’s gross pay for Social Security tax each pay period.

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• In this example, you would deduct $124 from this employee’s gross pay for Social Security tax each pay period.
• Since the employer tax must equal what the employee Medicare tax is, your share as an employer would be $29.
• FICA, or Federal Insurance Contributions Act, taxes are social security and Medicare taxes that both employers and employees pay.
• All of our content is based on objective analysis, and the opinions are our own.
• Unlike payments made to Social Security, there are no maximum contribution limits, or caps, that apply to Medicare.
• We suggest consulting a tax professional or payroll provider who operates in your state to learn more about state-specific requirements.

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Both employer and employee pay an equal amount of Social Security and Medicare taxes, totaling 15.3% of the employee’s gross earnings. In certain years, the effective rate paid by employees, employers, and/or self-employed workers was less than the rate received by the trust funds, with the difference covered by general revenue. For the latest on how federal and state tax law changes may impact your business, visit the ADP Eye on Washington Web page located at /regulatorynews. Employers and direct materials cost employees have to pay FICA taxes to cover their social security and Medicare obligations.

Contribution Rates and Thresholds

Below is a summary table taken from IRS Publication 15 of the penalties that you may be required to pay based on the number of days your payment is late. Note that the Social Security tax wage limit can change every year. Ensure that you check announcements from the Social Security Administration (SSA) from time to time.

This portion of the FICA taxes has a tax wage limit, which means that once an employee’s gross wage has reached the threshold, no additional Social Security is deducted for the remainder of the year. Since your tax amount must match the employee’s, you would also have no additional Social Security liability for the remainder of the year. If you’d prefer to not have to calculate and pay FICA taxes yourself, consider using a payroll software like Gusto.

This added tax raises the wage earner’s Medicare portion of FICA on compensation above the threshold amounts to 2.35 percent; the employer-paid portion of the Medicare tax on these amounts remains at 1.45 percent. About 178 million U.S. wage earners paid Social Security taxes this year. Roughly 6 percent of workers earn more than the current taxable maximum, according to the SSA. Robie professional tax and business solutions Ann Ferrer is an HR expert writer at Fit Small Business, focusing on small business HR and payroll software content. Robie also worked as an HR specialist for 10 years where she managed various facets of HR—from payroll and benefits to employee services and HR systems.

The rate on that tax would be 7.4%, with a matching 7.4% obligation for employers. Such a move could increase FICA withholding for high-income individuals by an even greater amount than the Sanders proposal, and it would add a progressive element to the FICA tax structure for the first time. For example, if an employee’s gross salary is $1000, then the social security tax would be $1000 multiplied by 6.2% resulting in an amount of $62.

Renew now to continue enjoying unlimited articles and exclusive resources. The taxable wage cap is subject to automatic adjustment each year based on increases in the national average wage, which last year rose by 3.6 percent. The Social Security wage base has increased from $132,900 to $137,700 for 2020, which increases the maximum individual contribution by $297.60.

The self-employment tax rate will be 15.3% (combined Social Security tax rate of 12.4% and Medicare tax rate of 2.9%) up to the Social Security wage base. In 2020, the maximum Social Security tax for a self-employed individual will be $17,074.80. 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.