What Small Businesses Need to Know About FICA Tax

What is FICA?

FICA is the federal income tax that funds Social Security and Medicare. The FICA tax rate is 15.3 percent of total earnings, half of which is withheld from an employee’s paycheck by their employer. In addition to the money they withhold, employers are responsible for paying the other half, so the FICA tax burden falls equally on the employee and the employer, at 7.65 percent of annual earnings.

Here’s a breakdown of what the FICA tax includes:

• The Social Security tax, which is 12.4 percent of income, is split between the employee and the employer. Business owners are required to withhold 6.2 percent from employees’ paychecks and match the remaining 6.2 percent. As of 2023, a maximum of $160,200 can be taxed to cover Social Security. This means those who make more than that are taxed for Social Security only on the initial $, not on anything more than that.
• Medicare tax: The Medicare tax is 2.9 percent, which is also split between the employee and the employer. The employer withholds 1.45 percent of their employees’ wages and pays 1.45 percent itself. There is no limit on the income that can be taxed for Medicare.
• Additional Medicare tax: There is an additional 0.9 percent tax for high-income earners — those who make over $200,000 as a single filer, $250,000 as a married person filing jointly or $125,000 as a married person filing separately. There is no employer match for this added tax.

What payments are not subject to FICA taxes?

FICA doesn’t apply to all wages. Here are some types of compensation that are not subject to FICA taxes:

• Wages paid after an employee dies (only for wages paid in the calendar year following the employee’s death)
• Expense reimbursements on mileage
• Employer retirement contributions

How is FICA calculated?

Calculating an employee’s and employer’s FICA tax contributions is straightforward: You multiply the employee’s gross pay by the tax rates for Social Security and Medicare. If your employee earned $1,000 this week and is required to contribute 6.2 percent to Social Security and 1.45 percent to Medicare, it would amount to $76.50. The employer would pay the other half. 

Here’s a closer look at the math:

Social Security tax for the week = 6.2% of the employee’s gross wages, plus the match from the employer

Social Security tax for the week = $1,000 * 0.062 = $62. The employer must withhold this amount from the employee’s paycheck for tax filing, and the business must pay this amount in taxes as well.

Medicare tax for the week = 1.45% of the employee’s gross wages, plus the match from the employer

Medicare tax for the week = $1,000 * 0.0145 = $14.50. You must withhold this amount from the employee’s paycheck and pay this amount in taxes.

Total FICA tax for the week to be withheld from the employee’s paycheck = $62 + $14.50 = $76.50

Calculating the FICA tax can get cumbersome if you have tens or hundreds of employees. The good news is that the best payroll services and certified public accountants (CPAs) can calculate it for you.

“Once you establish a payroll policy and have it up and running, it’s rare for a small business to run into trouble with FICA taxes,” said Mike Slack, a manager at The Tax Institute at H&R Block. “The only thing that changes yearly with FICA is the maximum wage limit for Social Security.” 

How do self-employed people calculate FICA taxes?

Those who are self-employed or independent contractors are required to pay both the employer and employee portions of Social Security, Medicare and Medicare surtax, which are collectively known as the self-employment tax. For 2023, self-employed workers and independent contractors pay a total of 15.3 percent in FICA taxes.

The IRS allows self-employed workers to claim 50 percent of the self-employment taxes paid as a deduction on their federal income taxes for the year.

Individuals registered as a sole proprietorship, limited liability company or partnership are on the hook for the self-employment tax. If you report your business taxes on Schedule C when filing your personal tax returns, you have to pay the self-employment tax.

Are FICA withholdings mandatory?

The Federal Insurance Contributions Act requires employers to withhold Social Security and Medicare taxes from employees’ wages. It is mandatory and ultimately the employer’s responsibility to fulfill. Small business owners who fail to collect, report or remit payroll taxes to the IRS face penalties and interest on the money they owe.

Small business owners may also face penalties if they misclassify workers as independent contractors. Under FICA rules, you don’t have to pay taxes on independent contractors, but if the IRS finds that your “independent contractors” should be treated as full-time employees, you could face penalties.

“The employer is the ultimate party responsible for FICA taxes,” Slack said. “Let’s say the corporation does not deposit those taxes over a certain period of time — the IRS can fine the owner.”

The best payroll services for handling FICA taxes

By using a payroll service to calculate, file and pay FICA taxes, you can streamline this often-cumbersome process for your business. Here are some of our picks for the best payroll services for handling FICA taxes:

• Intuit QuickBooks Payroll: Intuit QuickBooks, the gold-standard accounting software provider, also offers a robust payroll suite, with some plans including tax-penalty protection. Learn all about this offering in our QuickBooks Payroll review.
• Rippling Payroll: Your payroll tax calculation, filing and payments become fully automated when your business uses Rippling. Our Rippling Payroll review details the advanced nature of this platform’s tax tools.
• Paychex: With Paychex, your year-end tax-form filings go off without a hitch, as do all of your payroll-tax calculations and payments. Our Paychex review explains how extensively this service covers your payroll needs.
• OnPay: This payroll vendor guarantees that it will handle all of your business taxation needs on time and without errors. Read our OnPay review to learn all about this platform’s tax functions.
• ADP Payroll: This payroll software from the leading name in HR software automates your tax filing from start to finish. Learn more in our ADP Payroll review.

FICA taxes don’t have to be scary

Although taxes have earned a reputation as an incomprehensible, confusing beast of a business requirement, you now know that the math behind many of them is elementary. Nonetheless, payroll services can automate all of your tax-payment and tax-filing needs — and that’s the smart way to go even if you love math. Between what you’ve learned about FICA taxes and the infrastructure you can implement around them, tax time will be a breeze.

Max Freedman contributed to this article. The source interview was conducted for a previous version of this article.