Learn about FICA, Social Security, and Medicare taxes, and how they impact your business this year.
Navigating tax season can be a challenge each year. Between keeping an eye on any changes with the IRS, awaiting your W-2 or 1099 in the mail, and gathering everything to file, it’s easy to get confused. Seeing terms like “deductions,” “credits,” “W-2,” “1099,” “Gross Income,” and “FICA” can make your eyes blur.
Fortunately, those terms aren’t nearly as intimidating as they may seem. The truth is that FICA itself is pretty straightforward and uncomplicated.
What is FICA?
So, what is FICA and why are we talking about it?
FICA is short for the Federal Insurance Contributions Act.
When you see the acronym FICA, it simply means federal withholdings for Medicare and Social Security. FICA tax percentages help fund the Medicare and Social Security programs in the United States.
Nearly everyone that works pays FICA because it is a federal tax, and the rates are eligible to change each year. It isn’t just enough to know what FICA is; you must be be able to accurately calculate your earnings. Not having a full understanding of the percentages being withheld in conjunction with your salary can mean owing taxes after you file.
Calculating FICA for the employee
Every time you get a paycheck, your deductions will have been automatically made through your employer’s human resources department. Thankfully, this is done for you without you having to think too much about it. The employer and the employee split the sum of these deductions 50/50.
So, how much is being withheld from your check each pay period?
The FICA withholding for the Medicare deduction is 1.45%, while the Social Security withholding is 6.2%. The employer and the employee each pay 7.65%.
This means, together, the employee and employer pay 15.3%. Now that you know the percentages, you can calculate your FICA by multiplying your pay by 7.65%.
As of August 8, 2020 there’s a temporary moratorium on worker payroll taxes for employees earning less than $100,000/year for wages earned between September 1 and December 31, 2020.However, it is important to note that as of August 8, 2020 there’s a temporary moratorium on worker payroll taxes for employees earning less than $100,000/year for wages earned between September 1 and December 31, 2020. This was created in an effort to keep more money in employees’ pockets to assist with emergent challenges and hardships that have resulted from the 2020 pandemic. But those deferred Social Security taxes do need to be repaid in between January 1, 2021 and April 30, 2021, so be ready for that change.
It’s important to realize that FICA does serve a purpose and that it is funding federal programs that you will most likely utilize one day. This isn’t lost money by any means. Make sure that you keep up to date with any changes in the FICA system with your HR department.
Calculating SECA for the self-employed
Another program, Self Employed Contributions Act (SECA), is the verbiage used for those that are self-employed. SECA can be even more daunting for those that are self-employed.
Unlike employees, those that are self-employed are responsible for the full FICA withholdings, since it is not shared with an employee.
Those sums are:
- 12.4% for Social Security on the first $142,800 of net income (6.2% each for being both an employer and an employee)
- 2.9% for Medicare (1.45% for employers plus 1.45% for employees)
The positive side is that those that are self-employed can file taxes quarterly and form their business budget with that in mind.
Those that are self-employed can pay this when they file estimated taxes quarterly. When you file, you will only have to claim 7.65%. That acts as your self-employed deduction. You will be able to take advantage of this whether you itemize your deductions or take the standard deduction.
In 2020, the Coronavirus, Aid, Relief and Economic Security Act (CARES Act) allowed self-employed individuals (who employ other people or just themselves) to defer payment of the deposit and payment of the employer’s share of Social Security taxes until 2021-2022. They were also given access to important tax credits.
To see how much you owe as someone that is self-employed, you will need to utilize the 1040-ES form on the IRS website.
In 2020, the Coronavirus, Aid, Relief and Economic Security Act (CARES Act) allowed self-employed individuals (who employ other people or just themselves) to defer payment of the deposit and payment of the employer’s share of Social Security taxes until 2021-2022.
Those in a certain tax bracket ($142,800 as of 2021) are not required to contribute towards Social Security. The exemption does not apply to Medicare; those in the higher tax bracket are still responsible for paying the Medicare tax.
There are some demographics that are exempt from paying FICA, but the exceptions are not far-reaching or plentiful. Here are some groups who can apply for an exemption:
- A few religious groups
- College students working a campus job, and
- Some residential foreigners
The common rule, though, is that if that exemption is made then they cannot benefit from the programs covered by FICA.
Pay attention to your paycheck
It’s important that you regularly track your paystub with your employer, particularly because of the temporary end-of-year changes. Calculate the dollar amount that you expect to see withheld every paycheck and make sure that the numbers are accurate. Mistakes happen, so it’s important to track things closely. Make sure you aren’t overpaying or underpaying for FICA each paycheck.
Those that are self-employed will want to be diligent in calculating as well. The other habit to form in your business is keeping track of the FICA percentages and accurately tracking your business expenses and income. Paying quarterly is a wise choice and keeping your expenses organized between each filing is imperative.
In some cases, people overpay on their FICA and are eligible for a refund once they file their taxes.