Understand how to calculate FICA for payroll tax and SECA for self-employed business owners this year.
Here's what you need to know:
- FICA is a federal income tax that is applied against gross earnings directly related to Medicare and social security
- If the employee earns $147,000 prior to the end of the year, the employee no longer pays into FICA
- Self-employed individuals are responsible for both sides of the social security and Medicare tax deductions
Making sure you are correctly calculating your payroll taxes can be a bit unnerving at best and stressful for most. You want to ensure your company complies with all IRS requirements, and FICA is top on that list.
But what, if anything, has changed within the FICA rules for 2022? Let’s dig into the regulation and get the information you need to successfully process your payroll. To do that, let’s start with the basics.
What is FICA?
FICA is the acronym for the Federal Insurance Contributions Act of 1935. Originally, FICA was enacted to provide for the Social Security fund. In 1965, President Lyndon B. Johnson determined that the Medicare fund needed an appropriate home and was consolidated under the FICA umbrella.
As such, FICA is a federal income tax that is applied against gross earnings directly related to Medicare and social security.
FICA is a federal income tax that is applied against gross earnings directly related to Medicare and social security.
Calculating FICA as part of your 2022 payroll
The nice thing about calculating FICA as part of your payroll processes is that there are very few variables.
There are 3 things to keep in mind when applying FICA to your payroll:
- Social security deductions are a flat amount for both the employee and the employer
- Medicare deductions are a flat amount for both the employee and the employer
- There is an income cap of $147,000 for FICA withholdings
2022 social security withholding information
Social security deductions are the responsibility of both the employer and the employee. The 12.4% withholding amount is applied evenly between both parties. So, each is accountable for paying 6.2% into social security each time payroll is processed.
Here’s how that would work:
- If an employee makes $1,000 in a pay cycle
- 2% or $62 would be deducted from the employee’s gross earnings and would be filed with the IRS
- 2% or $62 would be applied against the employer’s payroll tax for that cycle and would also be filed with the IRS
- In total, 12.4% has been applied to the social security portion of FICA—half by the employee and half by the employer
2022 Medicare calculation information
Medicare gets a little more tricky, but not much. Like social security, there is both an employer and employee portion that is paid. The standard Medicare total deduction is 2.9%. The employee pays 1.45%, as does the employer.
So, in this scenario, with the same $1,000 pay cycle earning:
- 45% or $14.50 would be deducted from the employee’s gross earnings and would be filed with the IRS
- 45% or $14.50 would be applied against the employer’s payroll tax for that cycle and would also be filed with the IRS
- In total, 2.9% has been applied to the social security portion of FICA—half by the employee and half by the employer
Oh, but wait! There’s more!
What about salary earning caps?
“Employers are responsible for withholding the 0.9% Additional Medicare Tax on an individual’s wages paid in excess of $200,000 in a calendar year.”
If the employee earns $147,000 prior to the end of the year, the employee no longer pays into FICA — they’ve capped out their benefit earnings. However, if the employee earns in excess of $200,000, a new Medicare tax is at that point applied to their gross earnings.
According to the IRS 2022 Topic No. 751 update (05-Jan-2022), “Employers are responsible for withholding the 0.9% Additional Medicare Tax on an individual’s wages paid in excess of $200,000 in a calendar year, without regard to filing status.”
The update goes on to discuss the expectation that the pay period in which the employee exceeds $200,000 is the point at which the additional 0.9% tax must be applied. This tax is applied against the employees’ earnings. The employer is not responsible for a match portion of this additional tax.
Looking in simple terms, if an employee is paid twice per month and earns a gross salary amount of $6,125 per pay cycle, they will hit the $147,000 salary mark at the end of the year.
What happens if someone is self-employed?
There are pros and cons to everything in life, and self-employment is no exception.
As a self-employed individual or sole proprietor, you are both the employee and the employer. Therefore, you are responsible for both sides of the social security and the Medicare tax deductions.
You pay your FICA equivalent through a program called SECA (Self Employed Contributions Act). This act was squeezed in between the social security and Medicare acts and was enacted in 1954. It basically recognized that entrepreneurs who were sole proprietors were not previously accountable for contributing to these tax funds, so the act was created.
That basically means that to have the benefit of being your own boss, you are responsible for paying:
- 4% into social security
- 9% into Medicare
The same salary cap rules apply to SECA, as does the over $200,000 per year additional Medicare tax application.
Fortunately, as a small business owner, SECA tax budgeting becomes a bit easier due to the expectation of filing estimated quarterly taxes.
Does everyone pay either FICA or SECA?
There are very few exceptions to the populations who are responsible for paying FICA or SECA. Those who may be eligible for an exemption include:
- Extremely low wage earners
- Some religious groups
- Specific residential foreigners
- College students working campus jobs
The taxman cometh
As the great Benjamin Franklin mused, “nothing is certain except death and taxes.” Fortunately, calculating FICA as part of your payroll process is a straightforward formula. One that you can also easily share with your employees, so they can learn how their taxes are calculated.
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