FICA stands for Federal Insurance Contributions Act. FICA is a federal payroll tax which is needed to be paid by the employers to make in addition to the payroll of employee taxes for the Social Security and Medicare programs. Employers and employees both are jointly liable for contributing 6.2% of employee gross income towards Social Security and 1.45% of employee gross income towards Medicare. There is no way to opt out of these two; they are deducted directly from the employee’s gross pay.
Your company always uses to deduct a certain amount from your each pay period. Payroll taxes are the means through which the government receives this money. Payroll taxes come in many different forms, such as unemployment taxes, income taxes, and FICA taxes. Medicare and Social Security taxes are two tax kinds which are included in the FICA tax group.
The Federal Insurance Contributions Act requires the majority of employees and employers to pay FICA taxes. Both Social Security and Medicare are paid for using the money. Social Security and Medicare taxes must also be paid if you operate a business. The Self-Employed Contributions Act’s provisions, which apply to self-employed individuals, are referred to as SECA taxes or self-employment taxes.
FICA Tax Rate and Paying of FICA Tax
Social Security and Medicare taxes both are paid by employers and employees. The employer is responsible for paying half of the required amount of FICA tax, while the other half amount is deducted from an employee’s paycheck.
- Social Security Tax (12.4% total): 6.2% of the employee’s paychecks are deducted for social security taxes (12.4% in total), while the remaining 6.2% is paid by the employer. Up to $147,000 in salaries is subject to the tax in 2022.
- Medicare Tax (2.9% total): The employee’s portion of Medicare Tax (1.45% of the total 2.9%) is deducted from their paychecks, while the employer is responsible for the remaining 1.45%. Medicare taxes have no upper income limit.
It is very important to submit timely both the share of employee and the portion of the FICA tax as an employer. It’s crucial that you comprehend the procedure while processing payroll because the FICA which is deducted must be deducted very accurately.
The Form 941, Which is submitted quarterly in that the employer reports all payroll taxes paid by him as well as taxes deducted from employee paychecks, such as employer FICA tax.
How to Calculate FICA Tax
As both the employers and employees are required to pay Social Security and Medicare taxes i.e. FICA Tax, 7.65% (6.2% + 1.45%) of an employee’s income is deducted from their paycheck, and the employer is responsible for paying 7.65% of the wages given to employees.
The majority of employers of a company are required to report FICA. Reports are sent either quarterly by using Form 941 or annually using Form 944. Mostly for small employers with yearly liabilities under $1,000, Form 944 is typically used.
We are also utilizing Form 941 for our sample report for better understanding. The entire taxes withheld over the course of a quarter are reported on Form 941. You must add up the following procedural information for each employee in order to complete Form 941 for reporting of FICA: wages paid, tips received, federal and Medicare taxes paid, as well as any other remuneration which is paid.
First Step: Compile Form of Your Employee
All staff members of your company must finish Federal W-4 forms and, if in case it is necessary, state W-4 forms for the reporting of FICA. The amount of income tax is deducted from each paycheck must be specified on the W-4 forms.
Second Step: Perform an Employee Census
Make a list of every worker who is participating in it. The following are exempt for the requirement of this:
Farm workers, persons designated as domestic employees such as housekeepers, gardeners, or anyone who work for you in a private residence and active members of the U.S. armed forces.
Run the calculations below for each employee listed in the census.
- Compensation: Determine the total compensation that your company is paying to each employee. This will covers tips and any other payments which are made to the staff members, such as sick pay which is made by your company or a third-party administrator. In such case there is no need to record any wages that are not subject to FICA; however, you must note this on Form 941 if they are such as payments which are made after a death of an employee’s.
- Internal Revenue Service: Determine how much federal income tax was generated from each employee during the third quarter. It Includes tips, taxable fringe benefits, and additional unemployment benefits, if any of them is applicable.
Third Step: Calculation
Main step is calculation for which you have to add the Social Security tax rate (6.2%) and the Medicare tax rate (1.45%) to the employees’ gross pay to determine their FICA tax.
You can determine the employer portion once you’ve determined the employee contribution. As the rates are the same for both employers and employees.
Let’s understand with example
In the example below, we figure out FICA for a worker whose gross pay was $300,000.
Once you are done with determining of the FICA contributions for each employee, now you have to add these to the total of all employee and employer taxes which is paid. You are now prepared to file your taxes, or deposit them, as the IRS calls them, since you are actually making a deposit that will be reimbursed in the form of benefits later on.
Social Security FICA Tax Wages Limit
The employee and the employer both are responsible for contributing to Social Security on employee income, up to a maximum salary of $147,000 in 2022. As a result, after an employee who has made $147,000 in compensation, then no further Social Security taxes are withheld from their salary for the rest of the year. You can’t owe any additional Social Security taxes for the rest of the year because your tax withholding must be equal to that of the employee.
The Social Security for the wage base ceiling for FICA is a flat 6.2% of remuneration. The wage base in 2021 is $142,800. An employee might contribute into their Social Security component of FICA is $8,853.60. This wage base is adjusted for the cost of living every year. Again, this is the amount of which employee is responsible for paying; the employer is also responsible for this sum.
Social Security Wage Limit
- In the year 2020 it is $137,700.
- In the year 2021 it is $142,800.
- In the year 2022 it is $147,000.
Example of Social Security FICA Tax
Suppose a worker receives $2,000 every pay month. The Social Security tax must be calculated as shown following:
$2,000 x 0.062 = $124
In the above example, you can take $124 per pay period out of the employee’s gross compensation to cover Social Security taxes. Your ratio as an employer would likewise be $124 because the employer and employee share of Social Security taxes must be equal. So, employee for this pay period, the total Social Security tax payment which you will send to the IRS would be $248.
Medicare FICA Tax Wages Limit
In terms of Medicare taxes, there is no wage tax. This implies that Medicare taxes must be paid on the total amount of wages an employee receives, regardless of how much they make. Similar to Social Security taxes, the employer will need to contribute an equal amount to match the Employee’s Contribution.
Example of Medicare FICA Tax
Let’s compute the Medicare tax by using the worker who made $2,000 per pay period:
$2,000 x 0.0145 = $29
In the above example, the employee’s gross pay would have $29 withheld for the Medicare tax. The employer’s portion would be $29 because the employer tax must be equivalent to the employee Medicare tax. In this scenario, the total Medicare tax payment would send to the IRS on behalf of the employee for the pay period would be $58.
FICA Tax Calculation
To calculate FICA tax contribution for an employee, multiply their gross pay by the Social Security and Medicare tax rates. For example, if an employee’s taxable wages are $900 for the week, their social security contribution would be: $900.00 x 6.2% = $55.80. Their Medicare contribution would be: $900.00 x 1.45%= $13.05. These are also the amounts the employer would pay.
How to Determine FICA Tax Due Dates
In the Lookback period, you will have to determine when your FICA tax obligations are due. You will either have to pay FICA tax monthly or semiweekly. It totally depends on you that overall FICA tax obligation during the time. You can pay monthly if you have most recent Lookback period’s tax liability which was under $50,000 and semiweekly if it was over $50,000.
Determining of FICA Tax Lookback Period
Let’s assume that the current date is January 1, 2022, and you need to figure out that when you will need to deposit your future tax payments. Employer FICA tax due for the preceding month must be paid either monthly or semiweekly depending on the period of time it covers.
There are three steps which you have to perform for determining the FICA Tax Lookback Period:
1. Determining of Your LookBack Period
From July 1 to June 30 of the previous year is considered the Lookback period. You can use the dates of July 1, 2020, through June 30, 2021, as your Lookback period for 2022.
2. Copy of Form 941 Which is filed
Forms 941 submitted for the lookback period which must include. For the subsequent quarters, this would comprise the 941 tax forms which are submitted:
- Quarter 3 of 2020 (July 1 – Sept. 30, 2020)
- Quarter 4 of 2020 (Oct. 1 – Dec. 31, 2020)
- Quarter 1 of 2021 (Jan. 1 – March. 31, 2021)
- Quarter 2 of 2021 (Apr 1 – June 30, 2021)
3. Adding of the Tax Liability
You must make a monthly tax deposit if your total tax obligation for the entire year is $50,000 or less. Taxes are due in every month by the fifteenth of the month or after it. On the other hand, if your overall tax debt exceeds $50,000, then you must submit your tax installments in every two weeks. The day of the week on which your payday occurred it determines the due dates for your semiweekly tax payments.
If your overall taxes either for the current quarter or the quarter before it total less than $2,500, an exception to this rule then it will apply. You are exempt from making a deposit in this situation. Alternatively, you could mail your payment along with your Form 941.
Since your tax liability for the Lookback period would be nil if you are a new employer, you are immediately regarded as a monthly depositor.
Types of Depositors & Due Dates for FICA Tax Payments
- You must pay to the IRS on a monthly basis if you are reporting taxes during the Lookback period totaled $50,000 or less.
- The 15th day of the next month is the deadline for the payments.
- The IRS requires semi-weekly payments from the taxpayers who reported more than $50,000 in taxes during the Lookback period.
- Your tax payments requires the following, it depends on the employee payday is:
- The next Wednesday is the day when your tax payment is due if your payday falls on a Wednesday, Thursday, or Friday.
- The next Friday is when your tax payment is due if your payday falls on a Saturday, Sunday, Monday, or Tuesday.
Mode of doing FICA Tax Payments
Payments must be made electronically via the Electronic Federal Tax Payment System if you deposit on a monthly or biweekly basis (EFTPS). There is no accepted method of payment other than in person.
All employee paychecks must have income taxes with it, as well as both employer and the employee’s must share the Social Security and Medicare taxes, which includes in the amounts which you send.
If you are exempt from making payments during the quarter, then you can mail your payment together with your Form 941 or submit it via the EFTPS.
A Federal Employer Identification Number is required for the use of EFTPS i.e. EIN or FEIN. The IRS will accept the applications for EINs.
Penalties for Late Payments of FICA Tax
A penalty of 2% to 15% may be imposed on you in case you are fail to deposit your payments on time or when you required to do so, or if you deposited less amount than it is necessary.
The penalties that you might have to pay dependent on how many days your payment is overdue which is summarized in the chart below:
- Late deposits are subject to a 2% penalty.
- Deposits received between six and fifteen days after the due date then it will incur a 5% penalty.
- Deposits made after the IRS has delivered the first notice for payment but before 16 days later then it is penalized by 10%.
- An amount that has been deposited but was instead paid to the IRS directly or with your Form 941 then the penalty of 10% occurs.
- Amounts that are unpaid longer than 10 days after the IRS gave you its first notice and demanding for the payment or 10 days after the day you received its notice demanding payment then the penalty of 15% is composed.
FICA taxes are Federal Payroll Taxes that both the employee and the employer must have to pay. If the monies are not remitted on time, the employer would be liable. The amount would be a combined rate for both employees and employers of 7.65% and cover both Social Security and Medicare.
Consider hiring a payroll provider like us so that there is no need to manually calculate and submit FICA tax on your own. For you, we will compute, deduct, and pay the FICA tax. Simply get in touch with Dancing Numbers team via LIVE CHAT, and we’ll assist you in the quickest possible method to calculate and pay.
Frequently Asked Questions
Is Employers used to Pay FICA Taxes on Employee Tips?
Employers are required to compute FICA on tips which the employees report to them. The employer portion of FICA on tips that are not reported to them is like their responsibility. Until the IRS notifies you for them, this obligation does not exist. There are schemes for voluntary tip compliance in some industries:
• TRAC is also known as Tip Reporting Alternative Commitment.
• The full form of TRDA is Tip Rate Determination Agreement.
• GITCA stands for the Gaming Industry Tip Compliance Agreement.
You may be eligible for a FICA tip credit if the amount of your tips is used to compute FICA which exceeds the federal minimum threshold.
Are there Any Additional FICA Tax Obligations for the Employer?
Employers’ obligations for the FICA tax is only partially include withholding FICA and depositing it with the government. Additional obligations include:
• To report FICA, you must file the employer tax returns -quarterly or annually if you’re a very small company.
• Employees’ tax returns the Social Security and Medicare payments Form W-2.
Regarding independent contractors or workers who are engaged by other business, employers are exempt from FICA obligations (e.g., temporary workers who are employed by the temp agency).
Is there a Need of Paying FICA Tax by Self Employed?
There is no need to pay FICA tax by Self-employed people. Self-employed people pay an equivalent amount of FICA through self-employment tax under the Self-Employed Contributions Act (SECA), which went into effect in 1954, to fulfill their Social Security and Medicare obligations. Individuals who work for themselves expressly pay the employee and employer share even if they are neither employees nor employers. Individuals who are self-employed they can deduct half of their self-employment tax from their gross income.