FICA Tax in 2023-2024: What Small Businesses Need to Know

Money collected from the FICA tax is used to fund Social Security and Medicare. FICA taxes were established by the federal insurance contributions act. According to the federal insurance contributions act, earnings from workers are taxes to fund the coffers for social security and medicare.

If you get a W2, your employer is typically responsible for handling the required withholding of the FICA tax. The employer withholds the FICA money, deposits it, reports it, and pays the required amount to the IRS.

What is FICA Tax?

The Federal Insurance Contributions Act (FICA) tax is a U.S. payroll tax that funds Social Security and Medicare, the country’s major social safety net programs. The tax rate is 15.3%, split into two parts: Social Security and Medicare. However, the way this tax is handled differs between employees and self-employed individuals.

Here are the details:

1. Social Security and Medicare Tax Rates:

• The Social Security tax rate is 12.4% of the employee’s gross income, up to a certain income limit. This limit, known as the wage base limit, changes yearly based on inflation and is $168,600 in 2024.
• The Medicare tax rate is 2.9% and applies to all earned income. There is no income limit for the Medicare tax. This brings the total FICA tax rate to 15.3%.

2. FICA Taxes for Employed Workers:

• Employers and employees each pay half of the total FICA tax rate. This means 7.65% is deducted from the employee’s paycheck, and the employer pays the other 7.65%.
• For the employee, this amount is calculated based on gross income. The employer then matches this amount, contributing the same towards the employee’s FICA taxes.

3. FICA Taxes for Self-Employed Workers:

• Self-employed individuals must pay the full 15.3% tax rate, as there is no employer to share the cost.
• However, the tax is applied to 92.35% of net earnings, not gross income. This accounts for the portion that would typically be paid by an employer.
• A tax deduction is then allowed for half of this self-employment tax amount, reducing the individual’s adjusted gross income and thereby reducing overall income tax.

4. Additional Medicare Tax:

• An additional Medicare tax of 0.9% is applied to individuals earning over $125,000 or couples filing jointly and earning over $250,000.
• This tax is paid entirely by the employee with no employer contribution.

It’s important to remember that while the overall FICA tax amount may be the same for self-employed individuals and those receiving W2s, the process and calculations involved differ. For the most accurate information, always refer to the current IRS guidelines or consult with a tax professional.

Who Pays FICA Tax

FICA taxes are paid by all workers. The FICA taxes are paid based on your total income from all sources.

If you have a job that produces a W2 plus a self-employed job, FICA taxes will first be taken from the W2 income amount. Then, the self-employment income will be taxed until the Social Security tax max is reached. For single filers, that’s all you need to know. If your filing status is married, the FICA taxes are paid separately by each working person.

What are your FICA taxes and social security max? That amount is adjusted each year and is based on specific income levels. For 2024, the maximum wage limit income level is $168,600. If you make more than that wage base limit, you won’t pay additional social security taxes.

But, there’s a Medicare surtax. You will continue to pay a .9% additional medicare tax on every dollar you earn above that. The additional tax portion is called the Medicare surtax.

Understanding FICA Tax

Let’s sum things up before going further. FICA taxes are a separate tax from your federal income tax. FICA taxes are 15.3% for all workers, both those with an employer and those who are self-employed workers.

The Social Security tax part is 12.4% and the Medicare tax is 2.9%. Your employer is required to withhold money to cover both the Social Security and Medicare taxes, in addition to withholding other payroll taxes. The employer must deposit that Social Security and Medicare money and pay it to the IRS.

2022-2023 FICA Limits and Tax Rates

Social Security taxes are capped each year according to income. For 2024, that number is $168,800. After that, the Medicare tax rate changes to .9%. In other words, you’ll continue to pay the full Social Security and Medicare taxes until you’ve earned the $168,800 threshold amount for wage base limits. After that, you won’t owe more Social Security tax, but you’ll owe the Medicare surtax.

How to Calculate FICA Tax

The FICA tax is levied against 92.35% of self-employed taxpayers’ net earned income. If you have an employer, your net income is what’s left after payroll taxes have been withheld. FICA requires employers to withhold and pay the taxes, both the Social Security and Medicare portion of the tax, based on employees’ wages.

If you’re self-employed or have a sole proprietorship, you’ll owe FICA tax on your net earnings. Self-employed individuals will pay FICA taxes (sometimes called self-employment tax) on their income after deductions or net income. Learn more about how to file self-employment taxes here.

Independent contractors who pay taxes quarterly must also pay the FICA tax quarterly. If you’re estimating your quarterly taxes, it’s best to estimate high on the FICA taxes so you aren’t charged any interest penalties on overdue tax amounts. You’ll be saving money by overpaying the tax.

Here’s a detailed breakdown of how to calculate these taxes:

1. Calculating FICA Tax for Employees:

• As an employee, you only pay half of the total FICA tax rate (i.e., 6.2% for Social Security and 1.45% for Medicare), and your employer pays the other half.
• To calculate, take your gross income (prior to any deductions) and multiply it by the respective rates for Social Security and Medicare.

2. Calculating FICA Tax for Self-Employed:

• If you’re self-employed, you’re responsible for the entire FICA tax (both the employee and employer portions). However, this is levied against 92.35% of your net earnings.
• To calculate, deduct your business expenses from your gross income to arrive at your net earnings. Multiply your net earnings by 92.35% to determine the amount of income subject to FICA taxes.
• Then, apply the combined Social Security and Medicare tax rates (12.4% + 2.9% = 15.3%) to calculate your total FICA tax. Remember that the Social Security portion only applies up to the wage base limit.

3. Independent Contractors and FICA Tax:

• Independent contractors, like self-employed individuals, are responsible for paying the entire FICA tax. They typically do this through quarterly estimated tax payments.
• Calculate your net earnings, apply the 92.35% factor, and then apply the 15.3% combined tax rate. Make sure to consider the wage base limit for Social Security.
• To avoid penalties, it’s recommended to overestimate rather than underestimate your tax liability.

Remember to consult with a tax professional or use online tax software to ensure accurate calculations. The IRS also offers resources and guides on their website to help with this process.

FICA TAX Example

Let’s use basic numbers to make the math easier. Say a self-employed taxpayer’s earnings after deductions were $100,000.

The FICA tax is levied against 92.35% of the net earned income. That means that the FICA tax would be figured using an earned income of $92,350. The self employment contributions require you pay Social Security tax, 12.4% of the $92,350, and pay medicare taxes of 2.9% of the $92,350.

As previously stated, if you have an employer, you’ll pay half of the FICA taxes, based on the net earnings from wages paid, and get an employer match for the other half. Independent contractors pay the full FICA tax rates, but they then can deduct half the amount of the FICA tax paid from their personal net income total, reducing the adjusted gross income.

The Self-Employed Contributions Act (SECA) and Why it Matters

The Self-Employment Contributions Act (SECA) of 1954 is a tax law that requires the owners of small businesses–such as S corporations, partnerships, and sole proprietorships–to pay a tax of 15.3% of their net income from self-employment for social security, medicare and disability insurance taxes. Before SECA became law, self employed people didn’t have to pay into Social Security and medicare. Both FICA and SECA taxes fund those valuable programs.

The Bottom Line

The FICA taxes may not matter to you now, especially if you’re of a certain age. You may view paying the FICA Social Security and Medicare tax as just one more sapping payroll tax against your pay, like all those other taxes that “come out of your pocket.”

But the FICA taxes are different from other payroll taxes. Later in life, the Social Security and Medicare tax you’ve paid may return to your pocket as you collect Social Security benefits and sign up for Medicare programs. When something impacts your personal finances, that’s when paying FICA taxes will make more sense.

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FAQ

Are FICA withholdings mandatory?

Withholdings for Social Security and Medicare tax collection is mandatory by federal law as part of the Federal Insurance Contributions Act. Social Security and Medicare taxes must be paid along with your federal income taxes. Both the employer (who’s handling the employee paychecks) and the self-employed must pay the FICA tax rates. For the self-employed, the FICA taxes are often called self-employment taxes.

Is Social Security the Same as FICA?

No. FICA taxes include a tax paid to the Social Security Administration and a tax paid to Medicare.

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