Learn About FICA, Social Security, and Medicare Taxes

There are certain taxes on income that everyone has to pay, and Federal Insurance Contributions Act (FICA) taxes for Social Security and Medicare are at the top of the list. Employers must withhold these taxes from employee paychecks and pay them to the IRS. FICA taxes are called payroll taxes because they are based on income paid to employees.

What Is the FICA Tax?

The total FICA tax is 15.3% based on an employee's gross pay. The employer and employee each pay 7.65%. Here is a breakdown of these taxes:

• The Social Security portion of FICA taxes is 6.2%—up to the annual maximum wages subject to Social Security.
• The Medicare tax is 2.9%—1.45% for employees and employers on all employee earnings with no limit.
• There is also an Additional Medicare tax of 0.9% for higher-income employees that must be withheld when the employee's income surpasses $200,000 for the year. Employees must pay this tax, but employers don't have to pay for it.

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.

Wages Exempt From FICA Tax

Some types of payments to employees are not included in Social Security wages. Generally speaking, payments that aren't considered earned income are free from Social Security taxes, including pension payments, distributions from a qualified retirement plan, and workers' compensation.

How FICA Taxes Are Calculated

To calculate the FICA withholding for employees, you must take the employee's gross pay and multiply it by the employee rate of 7.65%. There are two important points you must watch in your calculations:

• You must ensure that each employee's total gross pay for the year does not exceed the Social Security maximum for the current year because you can't deduct more than the maximum Social Security amount each year.
• You must also ensure that the additional Medicare tax is withheld on the earnings of higher-paid employees when their earnings reach $200,000 in a year. 

Withholding Too Much FICA 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.

Paying and Reporting FICA Taxes

You must send FICA tax deposits—along with amounts withheld from employee pay for federal income tax—to the IRS periodically. You must make deposits of these amounts either semi-weekly or monthly, depending on the average size of deposits for the past year (new businesses deposit monthly).

Employers must send a quarterly payroll tax report to the IRS on Form 941, including information FICA taxes withheld from employee pay for the quarter and the employer portion of those taxes that must be paid.

This report, due on the last day of the month after the end of each quarter, shows amounts deducted from employee paychecks, amounts due from employers, and amounts paid during the quarter.

Self-Employment Tax

The Self-Employment Contributions Act (SECA) requires self-employed individuals to pay Social Security and Medicare taxes on their self-employment income.

The rates for self-employment tax are 12.9% for the Social Security portion and 2.9% for Medicare. The self-employed taxpayer can deduct half of their SECA tax when they're calculating their adjusted gross income. The maximum for Social Security also applies to SECA tax, and the additional Medicare tax applies to combined employment and self-employment income.

Frequently Asked Questions (FAQs)