It’s vital for business owners to stay well-informed on certain matters—for example the best insurance options, marketing strategies, and funding opportunities, the types of things that support your company and help it grow.
Another business essential every employer and business owner should understand when embarking on their journey of hiring employees is a federal payroll tax known as the Federal Insurance Contributions Act, or FICA. This guide will help you understand and calculate FICA taxes for your business.
What is FICA tax?
The Federal Insurance Contributions Act tax, known commonly as FICA tax, is money withheld from an employee’s pay by their employer to then be collected by the federal government. The FICA tax funds the federal government’s Social Security and Medicare programs. In turn, FICA helps provide benefits to retirees, children, and the disabled.
How does FICA tax work?
An employer deducts a percentage of an employee’s gross pay for FICA taxes. When the deduction is made from the employee’s paycheck, the employer is responsible for remitting it to the IRS (Internal Revenue Service). The employer also matches the employee's portion and submits both. Self-employed individuals withhold a version of FICA taxes from their income, known as self-employment tax, and pay both the employee and employer portions.
FICA tax refers to two types of taxes: Social Security tax and the Medicare tax. Almost all income is subject to FICA taxes, with a few exceptions:
- Some minor children. Children under 18 employed by their parents do not pay FICA taxes.
- Retirement distributions. Income received from qualifying employer retirement plans, such as a 401(k), is not subject to FICA tax.
- Students. Students employed and earning income from the school, college, or university they attend do not pay FICA taxes.
- Others. Some religious organization employees and state or local government employees may be exempt from paying the FICA tax.
FICA taxes pay the Social Security and Medicare benefits of current beneficiaries. A person earns one credit for each quarter they pay these taxes and needs 40 credits to claim Social Security benefits at their eligible age.
What is the FICA tax rate?
The overall FICA tax rate is 15.3%. This FICA tax rate is divided equally between the employee and the employer, so each is responsible for 7.65%. The Social Security tax accounts for 6.2% and the Medicare tax accounts for 1.45%. Employers use the employee’s gross pay to determine the FICA tax amounts.
There is a wage base limit on the Social Security tax, meaning some income is exempt from the tax. In 2022, only the first $147,000 of an employee’s income is subject to the Social Security tax. Any income earned over that amount does not have the 6.2% for Social Security withheld. There is no limit on the Medicare tax, but there is an additional tax of 0.9% for single filers on earnings over $200,000 and joint filers on earnings of more than $250,000.
How to calculate FICA tax
FICA tax is calculated differently based on your income and whether you are a single filer or filing jointly. If you are trying to determine how much should be withheld for FICA, multiply the tax percentage by the employee’s gross income. The formulas are:
Gross income (up to $147,000) x 6.2% = Social Security tax
Gross income x 1.45% = Medicare taxes
Additional income over $200,000 x 0.9% = Additional Medicare taxes
PAYROLL TIP: If you are looking for a quick way to create paychecks for your employees try Shopify's pay stub generator.
Here are some scenarios to help understand the differences based on the amount of income.
Single filer earning $45,000
To calculate Social Security tax, multiply the $45,000 salary by 6.2%, for $2,790 due. For Medicare tax, multiply the salary by 1.45%, for $652.50 due for Medicare taxes. A total of $3,442.50 is due from this employee’s salary for the employee’s portion of FICA taxes.
Single filer earning $210,000
Social security tax is only calculated on the first $147,000 of an employee’s income, so the employer multiplies that income by 6.2%, for $9,114 in Social Security taxes. For Medicare taxes, a single-filer earning more than $200,000 pays an additional 0.9% on earnings over $200,000. Therefore, $210,000 is multiplied by 1.45%, for $3,045, and the additional $10,000 is taxed at 0.9%, for an additional $90 in Medicare taxes, for Medicare taxes owed of $3,135. The total FICA taxes for this employee is $12,249.
Joint filers earning over $275,000
If one spouse earns $225,000 and the other earns $100,000, Social Security tax is still calculated the same. The employer is responsible for withholding 6.2% on the first $147,000 for the employee earning $225,000, for $9,114 in Social Security taxes. The spouse earning $100,000 will have their whole income subject to Social Security tax, for a total of $6,200. The joint Social Security liability for these filers is $15,314. For Medicare taxes, the filers will owe additional Medicare tax, since the combined income is over $275,000. The employer of the spouse earning $225,000 is responsible for withholding the additional Medicare tax of $225 ($25,000 x 0.9%), in addition to the regular Medicare tax amount of $225,000 multiplied by 1.45%, for $3,262.50 in Medicare taxes. The spouse earning $100,000 will have $1,450 withheld for Medicare taxes. The couple will be responsible for $4,937.50 for Medicare taxes. Their total FICA taxes: $20,251.50.
Joint filers who each earn below the $200,000 threshold but earn more than $250,000 combined would not be required to have the additional Medicare tax withheld by their employers. That’s because neither meets the individual $200,000 threshold, which would require employers to withhold the additional tax.
FICA tax FAQ
What is the purpose of the FICA tax?
The FICA tax provides for the Social Security and Medicare programs that benefit children, retirees, and disabled people in the US. The Federal Insurance Contributions Act (FICA) was passed in 1935 in response to the Great Depression and began by funding Social Security. It later expanded to include Medicare.
Is FICA tax the same as Social Security?
FICA tax includes two contributions: the Social Security tax and Medicare tax. The FICA tax rate is 7.65%, and is paid equally by employee and employer, for a total of 15.3%. Of that, 6.2% is for the Social Security tax and 1.45% is for the Medicare tax.
Does everyone pay FICA tax?
Nearly everyone pays FICA tax, with a few exceptions: children under 18 employed by a parent, retirees receiving distributions from a qualified employer retirement plan, and students working at the school they attend. Some religious organizations and state and local employees may also be exempt from FICA.