What is FICA Tax?

FICA stands for “Federal Insurance Contributions Act” and is a type of payroll tax (based on employee income) that is withheld from an employee’s earnings and paid by both the employer and employee. It’s a tax that most (but not all) Americans are subject to and one that we’ll look at in this guide. If you’re not sure how this tax works, how much you owe, where your money goes, and at what point you stop contributing, this is the guide for you.

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Keep reading to learn more about FICA tax contributions from the perspective of an employee, an employer, and a small business owner.

Understanding FICA Tax

FICA Tax is a mandatory payroll deduction that has two elements totaling 15.3% of your gross pay. The employee pays 7.65% and the employer pays the rest, with the money split between:

  • Social Security: 6.2% of the employee’s 7.65% contribution goes towards the Old Age, Survivors, and Disability program (OASDI), and is capped at the maximum taxable income for social security ($137,700 for 2020).
  • Medicare: The rest of the tax goes towards Medicare tax, with employees and employers paying 1.45% each. Employees earning more than $200,000 ($125,000 for married and filing separate; $250,000 for married and filing jointly) will also be asked to pay an additional 0.9%, but the employer doesn’t contribute any of this.

FICA Tax and Self-Employed Individuals

Some payments are not subject to FICA tax. For instance, the earnings of a self-employed business owner will not be subject to FICA tax withholding. Instead, they will be tasked with making contributions via the Self-Employed Contributions Act (SECA).

The tax rate for self-employed individuals is 15.3% and, as with FICA tax, this covers Medicare and Social Security contributions. These contributions are capped at $135,000 for the Social Security aspect but there is no maximum for the Medicare contribution. As with FICA taxes, there is also a higher-rate imposed on those earning more than the benchmark.

If your child is working for your business and they are under the age of 18, payments will not be subject to Medicare or Social Security taxes. However, payments to a spouse or partner will be subject to these tax contributions.

What is Gross Pay?

FICA tax is based on your gross pay, so the first step to understanding how much you owe is to know what your gross pay is. Your gross pay is simply all of your salaried and hourly pay, along with overtime earnings.

If you’re a salaried worker, your gross pay is your weekly, bi-weekly, or monthly pay multiplied over the year. For example, if you earn $1,000 every other week, your total gross pay can be calculated by multiplying $1,000 (your pay) by the number of payments made over the year (24). This means your gross pay will be $24,000. If you’re paid every hour, your gross pay is your monthly hours multiplied over the year.

For example, if you earn $20 an hour and work 40 hours a week, that’s $800 a week, $2,400 a month, and $28,800 over the year.

In addition to FICA tax calculations, you will also need to know your gross pay when completing your tax return and when calculating your debt-to-income ratio, which is highly recommended if you’re on a budget and struggling to make ends meet.

Calculating FICA Taxes for Employees

To calculate FICA withholding for your employees, calculate their gross pay, including overtime payments, and multiply by 7.65%. First, make sure that their total gross pay doesn’t exceed the maximum limits for the Social Security contributions, as you cannot deduct more than this amount. You also need to withhold the right amount from those in the higher-earnings bracket.

If you withhold more than required, you will need to return this money to your employee. If you’re using payroll software, make sure the money you returned is not classified as additional income. 

FICA Tax FAQs and Recap

If you still have a few questions about FICA tax contributions, how they work, and how they are calculated, take a look at these short FAQS.

What Does FICA Tax Stand For?

FICA is short for “Federal Insurance Contributions Act”. It is a federal tax and the government requires most businesses to withhold this money from their employees.

Is FICA the Same as Social Security?

They are not entirely the same, but they are similar. FICA contributions are used to fund different aspects of Social Security, including disability benefits, retirement accounts, survivor benefits, and Medicare. As employees work, earn, and contribute to FICA, they will earn credits to go toward Social Security benefits.

How Much is FICA Tax?

The tax rate is currently fixed at 15.3% of the employee’s gross pay. It is paid by the employee and employer, with 12.4% going to Social Security and 2.9% to Medicare.

Are FICA Contributions Deductible?

A business can deduct the employer portion of FICA tax, but the money withheld from an employee’s portion is not deductible.

What is the Cap?

The Social Security aspect of FICA tax is capped, and this changes year to year. In 2019, it was fixed at 2,900, and this increased to 7,700 in 2020. Earnings above this amount will not be subject to additional tax withholdings.

What Payments are Not Subject to FICA Tax?

FICA Tax is not paid by everyone and there are several payment types not subject to a FICA tax withholding, including:

  • A disabled worker’s wages paid after qualifying for disability insurance benefits.
  • Children under the age of 18 employed through a parent’s company.
  • Income earned via tips if it is less than $20 a month.
  • Workers’ compensation payments.
  • Any wages paid following an employee’s death.
  • Contributions made to a retirement plan or pension plan.