What Is FICA Tax, and How Much Do You Need to Take Out of an Employee’s Paycheck for It?

As an employer, you’re in charge of paying your employees … and handling those pesky employment taxes. One of the taxes you need to calculate and withhold is a payroll tax known as FICA. What is FICA tax?

What is FICA tax?

FICA is a mandatory payroll tax equally split between employees and employers. Unlike federal income tax, FICA tax is a percentage of each employee’s taxable wages. It consists of two types of taxes: Social Security and Medicare. Part of the FICA percentage goes toward Social Security and the other part goes toward Medicare. 

If you’re wondering What does FICA stand for?, it is short for Federal Insurance Contributions Act. But, what does insurance have to do with Social Security and Medicare? 

Both Social Security and Medicare taxes are “insurance” taxes. Social Security includes the old-age, survivors, and disability insurance taxes. Medicare includes hospital insurance tax.

When you collect FICA tax from employees and pay the employer portion, you’re contributing to the Social Security and Medicare programs. These programs distribute benefits to eligible individuals who have paid into them, just like any other insurance program would. 

How much is FICA tax?

Employers and employees each pay the FICA tax rate of 7.65%, which goes toward Social Security and Medicare taxes. Again, this rate is applied to each employee’s taxable wages. All in all, the IRS receives 15.3% on each employee’s wages for FICA tax.  

You withhold 7.65% of each employee’s wages each pay period. And, you contribute a matching 7.65% for the employer portion. 

Of this FICA tax amount of 7.65%, 6.2% goes toward Social Security tax and 1.45% goes toward Medicare tax

Take a look at the breakdown of FICA tax:

Employee: 6.2% Social Security / 1.45% Medicare Employer: 6.2% Social Security / 1.45% Medicare 

Social Security

Again, Social Security is 6.2% of an employee’s taxable wages. This rate provides funding aid for retirement, the disabled, and survivors of a deceased worker. 

Let’s say you pay an employee $1,000 per pay period. Out of that paycheck, $62 goes toward Social Security tax ($1,000 X 0.062). You also contribute $62 for the employer portion. 

The Social Security employee-employer tax isn’t infinite. There’s a Social Security wage base. If an employee earns above the wage base, stop withholding and contributing the 6.2% Social Security portion of FICA tax. 

For 2020, the wage base is $137,700. If you accidentally withhold Social Security tax past the wage base limit, refund your employee(s).

Medicare

Withhold 1.45% of an employee’s taxable wages for Medicare and contribute a matching 1.45%. Medicare tax provides aid for things like healthcare and hospice care.

For example, you would withhold $14.50 for Medicare tax from an employee’s wages if they earn $1,000 per pay period ($1,000 X 0.0145). And, you would contribute $14.50 for the matching employer portion.

Unlike Social Security, there is no wage base limit for Medicare tax. In fact, there’s an additional Medicare tax. The wage for this additional amount depends on the employee’s filing status:

Single: $200,000  Married filing jointly: $250,000  Married filing separately: $125,000

The additional Medicare tax is 0.9% of an employee’s wages. If an employee’s wages are subject to the additional Medicare tax, withhold 2.35% (1.45% + 0.9%). 

You do not need to match the additional Medicare tax. It is

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