What Is FICA Tax? Understanding Payroll Tax Requirements

The Federal Insurance Contributions Act, also known as FICA, is a type of payroll tax that employers withhold from an individuals’ paychecks and pay to the Internal Revenue Service (IRS). Along with the deduction from the employees and contribution from employers, the FICA tax is used to fund Medicare and Social Security programs.

Introduced in the 1930s to pay for Social Security, and later Medicare, FICA tax is collected to provide benefits for war survivors, people with disabilities, retirees and people enrolled in the federal health insurance program. It’s calculated as a percentage of an employee’s gross pay.

What this article covers

• What Is the FICA Rate for 2018?
• Is FICA Tax the Same as Federal Income Tax?
• Is FICA Included in Federal Income Tax?

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

What Is the FICA Rate?

The FICA rate for 2018 is 15.3%. This is divided into four portions the employee contribution to Social Security, the employer contribution to Social Security, the employer portion of Medicare, and the employee portion of Medicare.

According to the IRS, the employer’s share of the Social Security tax and Medicare is the same as the employee. The current tax rate for social security is 12.4% total or 6.2% each for both the employer and the employee. This means that you must withhold 6.2% of the employee wages for the tax while also contributing an additional 6.2% as your share of tax as an employer.

Similarly, the current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.

It’s important to note that the rules differ for employees who receive tips. Also, the employer does not contribute to the Medicare surtax, also known as Additional Medicare Tax, of 0.9 percent that is imposed on high-earning employees.

This means that you must withhold a 0.9 percent tax from employee wages and do not have to pay the employer’s contribution. The surtax is imposed on employees whose wages exceed $200,000 in a calendar year.

The wage base limit which refers to the maximum wage that’s subject to tax each year is only applicable to Social Security tax. In 2020, the current wage base is $137,700 (Refer to “What’s New” in Publication 15).

In addition to federal taxes paid for Social Security and Medicare, certain states and local governments may also impose taxes on disability funds and worker’s compensation funds.

Is FICA Tax the Same as Federal Income Tax?

While both federal income tax and FICA taxes are employment taxes that employers must withhold from an employee’s paychecks, there are some fundamental differences between the two components of U.S. federal payroll taxes

Unlike FICA taxes which only apply to earned income, including salaries, wages, and bonuses, federal income tax applies to all your income, irrespective of how you earned it. This means the income tax is applied not just to your employment income but also dividends, interest, short-term capital gains, annuities, and pensions.

Deductions

Also, when calculating your federal income tax, you can claim deductions for things like student loan interest, mortgage interest, state and local taxes, and contributions to a charitable organization. These deductions do not apply when the employer calculates the FICA taxes from your paycheck.

Filing Status

The federal income tax is a progressive tax that is affected by your tax filing status. This means that the higher your income, the higher the tax rate. The individual tax rates can range from ten to thirty-seven percent. 

In contrast, the FICA taxes which include Social Security tax and Medicare tax, are not affected by your filing status. A flat tax percentage is calculated and deducted from your salary. 

This tax is actually a regressive tax in that it only applies to a certain amount of earned income each year, known as the contribution and benefit base, which increases most years due to inflation.

Is FICA Included in Federal Income Tax?

FICA is not included in federal income taxes. While both these taxes use the gross wages of the employee as the starting point, they are two separate components that are calculated independently. The Medicare and Social Security taxes rarely affect your federal income tax or refunds.

To calculate the federal income tax, the employer will use the information provided in Form W-4 along with the taxable income and how frequently you’re paid. If you’re paid for overtime or receive a bonus, your federal income tax withholding will increase.

To calculate the FICA tax withholding, the employer must set apart a set amount from the gross wages, which includes 6.2% for Social Security and 1.45% for Medicare. If you earn more than $200,000, an additional Medicare tax of .09% is applied to the excess.

Based on the size of your total employee payroll, you must make payments to the IRS semi-weekly or monthly. Also, at the end of each quarter, you must report the payroll taxes using Form 941. Failure to pay payroll taxes leads to penalties and fines.

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