Confronting Payroll’s Four-Letter Word: FICA

The Federal Insurance Contributions Act, commonly referred to as FICA, is an act passed in the 1930s that establishes a system to pay for Social Security and Medicare. Both employers and employees pay FICA taxes, calculated based on an employee’s pay. All workers must contribute a set percentage of their wages to both federal social safety net programs.

Below are some of the basics of FICA taxes to help ensure you remain compliant as you pay your employees and determine the correct withholdings.

How is FICA calculated?

FICA taxes are calculated using an employee’s gross pay, including overtime. It is made up of two parts: the Social Security tax and Medicare tax. While both categories are paid by employers and employees, there are a few key distinctions between the two types of taxes.

Social Security tax is a total of 12.4 percent of wages that’s split evenly between the employer and the employee. Social Security FICA taxes apply only to the first $132,900 (as of 2019) in wages an employee makes. The employer and the employee both pay 6.2 percent to make up the full amount of the tax.

Medicare tax is also split evenly between the employer and the employee, with each paying 1.45 percent of wages—for a total of 2.9 percent. Unlike Social Security, there is no wage limit on withholdings. Instead, Medicare taxes increase if you reach an upper wage limit of $250,000 if married filing jointly, $125,000 for married filing separately and $200,000 for a single person.

Employees with annual wages exceeding these figures must pay an additional 0.9 percent in Medicare contribution. This additional tax only applies to employees and does not affect employers.

What if you withhold too much?

A report of FICA taxes must be sent to the Internal Revenue Service quarterly on Form 941. This report details the amounts that were deducted from paychecks, what the employer owes and how much was paid over the course of the previous quarter. If you inadvertently withhold too much for FICA because your employee reached the wage limit for the Social Security tax, for example, you must repay it the employee.

If an employee pays too much in FICA because he or she earned income from more than one job and collectively exceeded the wage limit, it is not the employer’s responsibility to correct the problem. The employee may file with the IRS to get the money back from the contributions that exceeded the wage cap.

Navigating federal tax requirements and withholdings can be complicated, but that doesn’t mean that FICA has to cause you financial headaches. As long as you are aware of the relevant requirements and enlist the support of a sound payroll system, you should have nothing to worry about when it comes to FICA.