FICA taxes: What they are, how they work and how to file them

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Page written by Ashlyn Brooks. Last reviewed on November 5, 2024. Next review due October 1, 2025.

There are a few commonly known tax requirements, and the FICA (Federal Insurance Contributions Act) tax is one of the most essential yet frequently misunderstood. FICA applies to nearly all employees and employers in the U.S., directly funding Social Security and Medicare programs.

Knowing how FICA works, who pays it, and how to calculate it accurately is crucial for smooth payroll management and avoiding compliance issues. At Swoop, we know that finance is much more than money and we want you to feel prepared when your bill from Uncle Sam comes due.

Here’s a straightforward guide to help break down the essentials of FICA tax and what it means for your business.

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What is FICA?

FICA stands for ‘The Federal Insurance Contributions Act’, and it’s a federal law that requires both employers and employees to contribute to Social Security and Medicare programs, which provide benefits for retirees, people with disabilities, and those in need of medical assistance. In short, FICA is a cornerstone of the American social welfare system, helping support people who’ve contributed to the workforce throughout their lives.

How does FICA tax work?

Like most taxes, the FICA tax is calculated based on a percentage of each employee’s gross wages. The tax is divided into two main parts:

Social Security Tax which covers retirement benefits and has a wage cap, meaning only earnings up to a set limit are subject to the tax.
Medicare Tax is the part that funds healthcare for people over 65 and has no wage cap, so contributions apply to all wages, with additional Medicare tax required for high earners.

For example, if an employee earns $60,000 annually, both the employer and employee would each contribute to Social Security and Medicare, calculated based on the set FICA rates. We’ll Discuss the percentages in more detail below.

What counts as FICA tax?

Social Security and Medicare Taxes are the only two places to which FICA taxes are contributed. Social Security pays for those who are currently in retirement or receive disability benefits while Medicare covers insurance for seniors and those with disabilities.

Is FICA tax voluntary or mandatory?

FICA tax is mandatory. Employers are required to withhold these amounts from employee paychecks and match them, making it an essential part of payroll for nearly all U.S. businesses. Noncompliance with FICA tax rules can lead to penalties, so it’s a big deal for businesses to manage FICA deductions accurately.

How much is FICA tax?

FICA tax is the actual amount withheld from employee paychecks (and matched by employers) to fund Social Security and Medicare. Employers are legally required to deduct this tax from employees’ wages and submit it to the IRS, ensuring contributions go directly toward these programs.

Currently, FICA taxes total at 15.3%. This is split equally between employees and employers so each is expected to pay 7.65%

What is the FICA tax rate in 2024?

The FICA tax rate is 15.3% total but it’s not all paid out by one group and it doesn’t all go to one place. here’s the complete breakdown for FICA taxes:

Social Security makes up 6.2% of wages for both employers and employees (totaling 12.4%), with an annual earnings cap.
Medicare then adds 1.45% of wages for both employers and employees (totaling 2.9%), with an additional 0.9% for high earners on income over a set threshold.

How is FICA tax calculated?

One of the more easily understood tax concepts, FICA tax is calculated by applying these rates to an employee’s wages. For example, If an employee earns $50,000, Social Security would be $50,000 × 6.2% = $3,100, and Medicare would be $50,000 × 1.45% = $725. The employer would also contribute an equal amount.

Who is exempt from FICA tax?

There are a few groups who can be eligible for exemption from FICA tax according to the IRS.

Self-employed individuals, who pay a similar self-employment tax instead.
Certain government employees who participate in other retirement systems.
Some students and educational workers, depending on the student status, employment, and foreign status.
Churches and church-controlled organizations can be exempt but must elect for exemption.

It’s important for businesses to know these exemptions to ensure they’re not over-withholding or misreporting.

How to file FICA tax

FICA taxes aren’t filed as you would file your income taxes, they are accrued over the year. Employers are responsible for withholding FICA tax and submitting it to the IRS so there’s no lump payment or filing. Here’s the process:

Employers withhold the tax from each paycheck.
Report contributions via IRS Form 941 each quarter.
Deposit funds with the IRS, following monthly or semi-weekly schedules depending on your business’s payroll size.

This includes both your portion and theirs.

How Swoop can help

At Swoop, we understand that running a business can have you pulled in multiple directions from taxes, to customer needs and more. One thing we don’t want you to worry about is cash flow and funding.

Register today to view our funding options including SBA loans, grants, and alternative financing.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

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