If you earn a wage or a salary, you’re likely subject to FICA taxes. (FICA stands for Federal Insurance Contributions Act.) Not to be confused with the federal income tax, FICA taxes fund the Social Security and Medicare programs and add up to 7.65% of your pay (in 2020). The breakdown for the two taxes is 6.2% for Social Security (on wages up to $137,700) and 1.45% for Medicare (plus an additional 0.90% for wages in excess of $200,000). Also known as payroll taxes, FICA taxes are automatically deducted from your paycheck. Your company sends the money, along with its match (an additional 7.65% of your pay), to the government. In this article we’ll discuss what FICA taxes are, how they’re applied and who’s responsible for paying them.
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FICA Taxes: The Basics
Every payday, a portion of your check is withheld by your employer. That money goes to the government in the form of payroll taxes. There are several different types of payroll taxes, including unemployment taxes, income taxes and FICA taxes. Two types of taxes fall under the category of FICA taxes: Medicare taxes and Social Security taxes.
Paying FICA taxes is mandatory for most employees and employers under the Federal Insurance Contributions Act of 1935. The funds are used to pay for both Social Security and Medicare.
If you own a business, you’re responsible for paying Social Security and Medicare taxes, too. For self-employed workers, they’re referred to as SECA taxes (or self-employment taxes) based on regulations included in the Self-Employed Contributions Act.
FICA Tax Rates
Both SECA and FICA tax rates have increased since they were introduced. Social Security tax rates remained under 3% for employees and employers until the end of 1959. Medicare tax rates rose from 0.35% in 1966 (when they were first implemented) to 1.35% in 1985.
For the past couple of decades, however, FICA tax rates have remained consistent. Employers and employees split the tax. For both of them, the current Social Security and Medicare tax rates are 6.2% and 1.45%, respectively. So each party pays 7.65% of their income, for a total FICA contribution of 15.3%. To calculate your FICA tax burden, you can multiply your gross pay by 7.65%.
Self-employed workers get stuck paying the entire FICA tax on their own. For these individuals, there’s a 12.4% Social Security tax, plus a 2.9% Medicare tax. You can pay this tax when you pay estimated taxes on a quarterly basis. To figure out how much you owe, you can use the worksheet and instructions provided by the IRS for Form 1040-ES.
Fortunately, if you’re self-employed, you’ll get to deduct half of the tax (7.65%) when you file your tax return. The self-employment tax deduction is an above-the-line deduction that you can use to lower your income tax bill. So you can claim it regardless of whether you’re itemizing your deductions or taking the standard deduction.
FICA Wage Base Limits
A wage base limit applies to employees who pay Social Security taxes. This means that gross income above a certain threshold is exempt from this tax. The wage limit changes almost every year based on inflation. For 2019, it was $132,900. For 2020, it’s $137,700. This income ceiling is also the maximum amount of money that’s considered when calculating the size of Social Security benefits.
Medicare taxes, on the other hand, don’t have a wage limit. But there’s an Additional Medicare Tax that high-income individuals must pay. That has been the case since January 1, 2013.
The Additional Medicare Tax rate is 0.90% and it applies to employees’ (and self-employed workers’) wages, salaries and tips. So any part of your income that exceeds a certain amount gets taxed for Medicare at a total rate of 2.35% (1.45% + 0.90%). That income ceiling for 2020 is $200,000 for single filers, qualifying widows and anyone with the head of household filing status; $250,000 for married couples filing joint tax returns and $125,000 for couples filing separate tax returns. You can calculate how much you owe using Form 8959.
FICA Tax Exemptions
Just about everyone pays FICA taxes, including resident aliens and many nonresident aliens. It doesn’t matter whether you work part-time or full-time. But there are some exceptions.
For example, college students are exempt from paying FICA taxes on the wages they earn from an on-campus job. Exemptions also apply to some nonresident aliens, including foreign government employees and teachers. Certain religious groups (like the Amish) may apply for an exemption from FICA taxes by filing IRS Form 4029. But by not paying these payroll taxes, they waive the right to receive Medicare and Social Security benefits.
Overpaying FICA Taxes
Some employees pay more Social Security taxes than they need to. This could happen if you switch jobs more than once and all of your earnings are taxed (even if your combined income exceeds the Social Security wage base limit). Fortunately, you may be able to get a refund when you file your taxes.
If you have multiple jobs, you can claim the Social Security over payment on Form 1040. If you owe any taxes, the IRS will use part of your refund to pay them off. Then, you’ll receive whatever is left over. If you overpaid Social Security and you only have one job, you’ll need to ask your employer for a refund. Excess Medicare tax repayments are nonrefundable since there’s no wage base limit.
If you have more than one job, you may underpay the amount of FICA taxes you owe. If that happens, you’ll have to make separate estimated tax payments (unless you asked for additional withholding on your W-4 form).
Like federal income tax, FICA taxes are mandatory – and in most cases, you can’t get around them. But since they go toward Medicare and Social Security, you will, in a sense, get the money back, at least indirectly, once you retire. (For this reason, some people would say that FICA taxes aren’t actually taxes.)
While FICA taxes are automatically taken out of your paycheck, you’ll need to pay close attention if you change jobs or have more than one. You want to be sure you’re not paying more than you’re required to. And if you’re self-employed, you’ll need to use the IRS worksheets to ensure you’re paying the correct amounts.
Coronavirus Update: To help employers with their cash flow, the CARES Act allows them to postpone paying their share (6.2%) of the Social Security tax for the rest of 2020. They must still deduct employees’ FICA taxes, though, and send them to the government. For employers’ share of Social Security taxes, they have until the end of 2021 to pay half of what’s due for 2020 and until the end of 2022 to pay the second half. If you’d like to know more, read our article, Payroll Tax Delay for Coronavirus-Impacted Businesses.
Tips for Tax Planning
- Due to the COVID-19 pandemic, the IRS moved its deadline for filing taxes this year to July 15. Most states followed suit, though a handful didn’t. The states and territories with different filing deadlines for tax gave tax year 2019 are: Mississippi (5/15); Virginia (6/1); Idaho, New Hampshire, Puerto Rico and Washington (6/15); Hawaii (7/20) and Iowa (7/31).
- If you are looking to make charitable contributions, transfer some of your wealth or leave your estate to your heirs in the most tax-advantageous way, a financial advisor can help. To find one, use our free financial advisor matching tool. It will connect you with up to three financial advisors in your area.
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