What is FICA Tax?
While you manage payroll as a small business owner, you have to give consideration to a multitude of taxes. Such charges can quickly pile up, ranging from withholding federal income taxes to FICA taxes. As a result, you surely would want to know what taxes you need to pay as employers or employees and why. So, let’s begin by learning about FICA.
What is FICA?
The Federal Insurance Contributions Act gets abbreviated as FICA. The act was passed in 1935. This act mandates that payroll taxes be withheld and utilized to fund the Social Security and Medicare programs. The Social Security Administration holds the charge for overseeing the Social Security program, a kind of insurance that all earners are obligated to contribute to in the US. It is popularly known for giving retirement benefits, but it also covers disability insurance and survivor benefits.
Considering the cost of healthcare in the United States, Medicare programs save poor communities from being financially unstable due to health issues. The Medicare plan is a government health insurance program in the US. It provides health insurance to individuals aged 65 and older and, in some circumstances, to young disabled people.
The FICA tax affects both employees and employers. It is directly deducted from the employee’s paycheck as part of payroll deductions. The employers hold the responsibility to calculate the payroll withholding. The employer’s portion of the FICA tax burden is equal to that of their workers. The FICA tax is aimed to assist retirees who are entitled to such financial aid for medical needs.
Prevailing tax rates for FICA tax in 2021
FICA taxes are applicable at the same rate to both employers and employees. These taxes get categorized into two types: Social Security and Medicare. However, the taxes used for these two schemes aren’t all the same. Let’s catch a glimpse of each of them regarding what the FICA tax rates are in 2021.
The Social Security tax rate applicable to employees is 6.2 percent, which is matched by a 6.2 percent rate for employers. The Social Security tax gets subjected to a wage base cap. In addition, as a result of inflation, the ceiling changes practically every year. The Social Security wage base limit has been set to be $1,42,800 for the year 2021. This limit implies that any earnings above this amount are not liable to Social Security tax.
An employee’s Medicare tax rate is 1.45 percent, with an extra 1.45 percent attributable to the employer. The overall Medicare tax rate for 2021 is now 2.9 percent.
Unlike the Social Security tax, there exists no wage base restriction for Medicare tax. It applies to all eligible earnings. Individuals earning more than $200,000 in gross salaries in a calendar year are required to contribute an extra 0.9 percent of income to Medicare.
Calculation of FICA tax
FICA taxes get computed as a proportion of the income of both the employee and the employer. Because both employees and employers pay the same amount in FICA taxes, you can use a simple computation to determine how much you each owe.
By combining Social Security and Medicare taxes in 2021, the tax rate will be 7.65 percent. FICA is computed by multiplying an employee’s compensation by the total FICA tax rate, or 7.65 percent.
Let’s take an example for clear understanding:
If you earn $50,000, you would apply the Social Security tax rate at 6.2 percent, and the Medicare tax rate at 1.45 percent.
- $50,000 X 0.062 = $3,100 ( Social Security Tax )
- $50,000 X 0.0145 = $725 ( Medicare Tax )
- $50,000 X 0.0765 = $3,825 ( FICA Tax )
These estimates take into account the employee’s share of the FICA tax. To pay your part of the FICA, you would have to equal that figure as an employer. Most businesses do not want to make these computations manually for every individual, so they rely on payroll software to simplify these time-consuming chores.
Who is required to pay FICA taxes?
Almost all earning individuals in the US have to pay FICA taxes. Taxpayers must pay it whether they work full-time or part, are salaried or hourly, are residents or nonresidents. However, in some exceptional cases you should be mindful while paying FICA taxes.
Which categories of individuals get exemption from FICA tax payment?
The following groups are exempt from paying FICA taxes:
- College students who earn by on-campus job
- Some religious groups who are eligible for exemptions
- Some nonresident aliens instructors, academics, and foreign government personnel are not permitted to work in the United States.
It is worth noting that those who do not pay FICA taxes are generally ineligible for Medicare or Social Security benefits.
Applicability of FICA taxes to self-employed individuals
FICA taxes and self-employment taxes both support the same programs. Presently, the self-employment tax rate is 15.3 percent of your earnings, with 12.4 percent going to Social Security and 2.9 percent going to Medicare.
As a self-employed individual, you are not required to pay FICA until your business is established. If it’s not, you can pay self-employment taxes instead of FICA taxes. As a freelancer, your tax requirements would be entirely different.
FICA Tax Payment and Reporting
As we all know, both employees and employers are liable for paying FICA taxes. One must withhold FICA taxes from your workers’ earnings as an employer. Once done collecting and matching employee FICA withholdings, the employer must submit the funds to the Internal Revenue Service (IRS).
Form 941 or Form 944 can be used to report FICA tax. The former, which is a quarterly tax return for employers, is more commonly used. Use only Form 944 if instructed to do so by the IRS.
How and when are FICA taxes deferred under CARES Act due?
The CARES Act got enacted in response to the economic impact of the coronavirus. One important advantage of this measure is that it permits companies to postpone paying their part of Social Security payments until December 31, 2020. Employers might delay payment of the employer part of FICA taxes (6.2 percent) under the CARES Act for any payroll made between March 27, 2020, and December 31, 2020.
So at the completion of this year, on December 31, 2021, half of the postponed sum will be payable. The remaining 50% becomes due on December 31, 2022.
FICA taxes – Is it deductible?
FICA taxes paid as an employer are deductible. Furthermore, employee pay from which FICA taxes are deducted is considered deductible expenses. However, one cannot deduct FICA payments received from employee earnings on the yearly federal tax return.
Professional support and innovative payroll software help simplify payroll tax responsibilities such as FICA tax!
The payroll expenditure quickly becomes convoluted, although FICA tax is uncomplicated. However, if you employ many individuals or pay a high gross income to some of your employees, calculating FICA tax might be difficult. Computing tax withholding, paying taxes on schedule, and reporting to the IRS can be a real hassle.
It is possible to overcome this obstacle by utilizing the services from Smart Accountants to simplify the procedure. You can regularly compute FICA taxes using our tax preparation services. Your payroll taxes shall be duly filed and reported to the IRS with our proficient staff. Our support frees up time for you to focus on your business while we manage the back-office tasks.
Our experts can assist you. Contact us for exciting tidbits and strategies!