How to calculate FICA tax: A guide for employers

FICA taxes are federal payroll taxes that fund Social Security and Medicare, with employers and employees each paying a share. Employers must calculate, withhold, and deposit these taxes according to IRS regulations.

As an employer, one of your key responsibilities is to ensure accurate payroll processing, which includes calculating and withholding the appropriate taxes from your employees' paychecks. Among these taxes are the Federal Insurance Contributions Act (FICA) taxes, which fund the Social Security and Medicare programs. 

Failing to calculate and pay FICA taxes correctly can result in penalties and interest charges from the IRS, making it essential for employers to understand the ins and outs of these taxes. This article breaks down how FICA taxes work and how to calculate them. 

What is FICA tax?

FICA stands for the Federal Insurance Contributions Act, which is the legislation that mandates the collection of taxes to fund the Social Security and Medicare programs. The FICA tax consists of two parts:

1. Social Security tax: This tax funds retirement, disability, and survivor benefits for workers and their families. As of 2024, the Social Security tax rate is 6.2% for both employees and employers, for a total of 12.4%. However, this tax only applies to the first $168,600 of an employee's earnings, also known as the Social Security wage base.
2. Medicare tax: This tax helps pay for health insurance for people over 65 and those with disabilities. The current Medicare tax rate is 1.45% for both employees and employers, for a total of 2.9%. Unlike the Social Security tax, there is no wage base limit for the Medicare tax, meaning it applies to all of an employee's earnings.

It's important to note that self-employed individuals are responsible for paying both the employee and employer portions of the FICA tax, which is known as the self-employment tax. The self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare) on the first $168,600 of net earnings and 2.9% on net earnings above that amount.

What is the FICA withholding process?

The FICA withholding process involves calculating and deducting the appropriate Social Security and Medicare taxes from each employee's paycheck and matching the withheld amount as an employer. Here are the key steps in the FICA withholding process:

1. Calculate the employee's taxable wages: Determine the employee's total compensation subject to FICA taxes for the pay period, including hourly wages, salaries, commissions, bonuses, and other taxable benefits. Note that some salary reduction amounts, such as pre-tax contributions to a 401(k) plan, may reduce taxable compensation.
2. Determine the Social Security and Medicare tax amounts: Apply the Social Security tax rate (6.2%) to the employee's taxable wages up to the wage base limit ($168,600 in 2024) and the Medicare tax rate (1.45%) to all of the employee's gross wages.
3. Withhold the taxes from the employee's paycheck: Deduct the calculated Social Security and Medicare taxes from the employee's gross pay.
4. Match the withheld amounts: As an employer, you must match the Social Security and Medicare taxes withheld from the employee's paycheck.
5. Deposit the taxes: Deposit both the employee and employer shares of the FICA taxes with the IRS according to the required schedule (monthly, semi-weekly, or quarterly, depending on your tax liability).
6. Report the taxes: Report the withheld and matched FICA taxes on the appropriate tax forms, such as Form 941 (Employer's Quarterly Federal Tax Return) and Form W-2 (Wage and Tax Statement) for each employee.

How to calculate the FICA tax rate: 5 steps

To help you better understand the FICA tax calculation process, let's break it down into five simple steps and illustrate each step with an example.

1. Determine the employee's taxable wages 

The first step in calculating FICA taxes is to determine the employee's taxable compensation for the pay period. This  include all compensation subject to FICA taxes, such as:

• Hourly wages or salaries
• Commissions and bonuses
• Overtime pay
• Sick pay and vacation pay
• Taxable fringe benefits

Real-world example: Let's say you have an employee named Sarah who earns an annual salary of $60,000. Assuming Sarah has no salary reduction amounts, her taxable compensation for the year would be $60,000. 

2. Calculate the Social Security tax

Apply the Social Security tax rate of 6.2% to the employee's gross wages, up to the annual wage base limit ($168,600 in 2024).

Since Sarah's taxable income  of $60,000 are below the annual wage base limit, you would calculate her Social Security tax as follows: $60,000 × 6.2% = $3,720

3. Calculate the Medicare tax

Apply the Medicare tax rate of 1.45% to all of the employee's gross wages. There is no wage base limit for the Medicare tax. Also, high-earning employees may be subject to the additional Medicare Tax of 0.9% on wages exceeding certain thresholds.

To calculate Sarah's Medicare tax, multiply her taxable income by 1.45%: $60,000 × 1.45% = $870

4. Determine the total FICA taxes to withhold

Add the Social Security and Medicare taxes together to get the total FICA taxes to withhold from the employee's paycheck.

Sarah's total FICA taxes for the year would be:

• Social Security tax: $3,720
• Medicare tax: $870
• Total FICA taxes to withhold: $3,720 + $870 = $4,590

5. Match the withheld FICA taxes

As an employer, you must match the Social Security and Medicare taxes withheld from the employee's paycheck.

In Sarah's case, you would also pay $4,590 in FICA taxes, bringing the total FICA taxes paid for Sarah for the year to $9,180 ($4,590 withheld from Sarah's paychecks throughout the year + $4,590 employer match).

How to pay FICA taxes

After calculating and withholding FICA taxes from your employees' paychecks, you must deposit the taxes with the IRS according to a specific schedule. The deposit schedule depends on your total employment tax liability reported on Form 941 (quarterly) or Form 944 (annually):

• If your tax liability is less than $2,500 for the current or previous quarter (Form 941) or for the year (Form 944), you may pay the taxes with your timely filed return instead of making deposits. 
• If your tax liability is $50,000 or less during the lookback period, you are a monthly schedule depositor. You must deposit the taxes for a given month by the 15th of the following month.
• If your tax liability is more than $50,000 during the lookback period, you are a semi-weekly schedule depositor. You must deposit taxes for Wednesday, Thursday and/or Friday paydays by the following Wednesday. For Saturday, Sunday, Monday and/or Tuesday paydays, deposit by the following Friday.

The lookback period covers the four quarters starting July 1 of the second preceding year and ending June 30 of the prior year for Form 941 filers. For Form 944, it's the calendar year two years prior.

Regardless of your schedule, if you accumulate $100,000 or more in taxes on any day, you must deposit the taxes by the next business day. This makes you a semi-weekly depositor for at least the remainder of the calendar year and the following year.

You must make all federal tax deposits electronically using the Electronic Federal Tax Payment System (EFTPS). Penalties may apply for depositing late, depositing less than required, or mailing payments to the IRS instead of depositing.

Who is exempt from FICA taxes?

While most employees are subject to FICA taxes, there are some exceptions. Here are five categories of workers who may be exempt from FICA taxes:

1. College students: Students who are enrolled at least half-time and working part-time for their university are generally exempt from FICA taxes on their wages.
2. Religious groups: Certain members of religious groups, such as the Amish and Mennonites, may be exempt from FICA taxes if they meet specific criteria and file Form 4029 (Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits).
3. Nonresident aliens: Some nonresident aliens with specific visa types, such as F-1 students and J-1 cultural exchange visitors, may be exempt from FICA taxes on their wages earned in the United States.
4. Foreign government employees: Employees of foreign governments, such as diplomatic personnel and consular officials, are typically exempt from FICA taxes on their wages.
5. Certain state and local government employees: Some employees of state and local governments who are covered by alternative retirement systems may be exempt from FICA taxes.

Carefully review the specific requirements for each exemption and consult with a tax professional or the IRS to determine if an employee qualifies for a FICA tax exemption.

Simplify payroll and tax filing with Rippling

Managing FICA taxes can be complex and time-consuming, especially for businesses with many employees. That's where payroll software like Rippling comes in.

Rippling automates FICA tax calculations, withholding, and payments, ensuring accuracy and compliance with IRS regulations. It also generates and files the necessary tax forms, like Form 941 and W-2s, saving you time and reducing the risk of errors.

Rippling streamlines the FICA tax process—and other payroll taxes, automatically calculating and filing them with the right federal, state, and local agencies at the right time, every time, so you can focus on running your business with peace of mind.

Frequently asked questions

Is FICA calculated on gross income or AGI?

FICA taxes are calculated based on an employee's gross wages, not their adjusted gross income (AGI). Gross wages include all compensation subject to FICA taxes, such as hourly wages, salaries, commissions, and bonuses, before any deductions are made.

How do I calculate Social Security tax?

To calculate Social Security tax, multiply the employee's gross wages (up to the annual wage base limit) by the Social Security tax rate of 6.2%. For example, if an employee earns $5,000 in gross wages, their Social Security tax would be $5,000 × 6.2% = $310.

What is the formula for calculating Medicare tax?

The formula for calculating Medicare tax is simple: multiply the employee's gross wages by the Medicare tax rate of 1.45%. There is no wage base limit for the Medicare tax. For example, if an employee earns $5,000 in taxable compensation, their Medicare tax would be $5,000 × 1.45% = $72.50.

What will your total FICA taxes be if you earn $50,000?

If an employee earns $50,000 in taxable income, the FICA calculation would be:

• Social Security tax: $50,000 × 6.2% = $3,100
• Medicare tax: $50,000 × 1.45% = $725
• Total FICA taxes: $3,100 + $725 = $3,825

The employer would also pay $3,825 in FICA taxes, for a total of $7,650 in FICA taxes for this employee.

Is FICA the same as federal income tax?

No, FICA taxes are separate from federal income taxes. FICA taxes fund specific programs (Social Security and Medicare), while federal income taxes go into the U.S. government's general fund to pay for various public services and programs.

Which forms are necessary for managing and reporting FICA taxes?

The main forms for managing and reporting FICA taxes are:

• Form 941 (Employer's Quarterly Federal Tax Return)
• Form W-2 (Wage and Tax Statement) for each employee
• Form W-3 (Transmittal of Wage and Tax Statements)

Depending on your business's specific circumstances, you may need to file additional forms related to FICA taxes.

Which two taxes make up FICA?

FICA consists of two taxes: Social Security tax and Medicare tax. These payroll taxes are collected from both employees and employers to fund the Social Security and Medicare programs in the United States.

This blog is based on information available to Rippling as of  4th September, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.