FICA, or the Federal Insurance Contributions Act, is an act implemented in the 1930s that sets up a system to finance Social Security and Medicare. FICA taxes are paid by both employees and employers, based on a worker’s wages.
Every workingperson is required to contribute a certain percentage of his or her income to each of these federal social safety net systems.
Here are some of the basics of FICA taxes to make sure that you stay on the right side of the law as you pay your workers and calculate the appropriate withholdings.
How is FICA calculated?
FICA taxes are assessed up the gross pay of an employee, even for overtime. It consists of two parts, the Social Security tax and the Medicare tax. Although they are both paid by the employer and the employees, there are some crucial differences between the two.
The Social Security tax is a combined 12.4 percent of wages, shared equally by the employer and the employee. Social Security FICA taxes are only taken on the first $132,900 (as of 2019) that an employee earns in wages. Both employer and employee pay 6.2 percent to cover the total tax.
Medicare tax is also divided evenly between the employer and the employee, who each contribute 1.45 percent of their wages – for a combined 2.9 percent.
Unlike Social Security, there is no cap on the income subject to withholdings. What happens instead is that Medicare taxes will rise on them when they hit a higher wage limit of $250,000 if married filing jointly, $125,000 for married filing separately and $200,000 single.
Workers who earn more than these annual amounts must also kick in an extra 0.9% for Medicare. It is an added tax for employees that will not impact employers.
What happens if you withhold too much?
With FICA taxes, you must report them quarterly to the Internal Revenue Service on Form 941.
This report shows how much was withheld from paychecks, how much the employer owes and the amounts it has forwarded during the previous quarter.
Let’s say, you mistakenly take too much out of your paychecks for FICA (the Federal Insurance Contributions Act) because your employee reached the wage ceiling for the Social Security tax, you still need to pay them back.
An employee who paid too much FICA because he or she had wages from more than one job and cumulatively exceeded the wage limit, is not a problem that the employer must correct. The employee can claim the money back from the contributions that exceeded the wage cap by filing with the I.R.S.
Final Thoughts
Federal tax laws and withholdings can be complex, but that does not mean that FICA would have to give you a headache. And if you know what the rules are and you have a good payroll system backing you up you should have nothing to worry about FICA.
