One of the many taxes that business owners are responsible for paying is FICA. But what is it? How is it used? Anyone who is not a sole proprietor, and who employs at least one employee must pay this tax. Below are some things you should know including how it should be calculated.
What The FICA Tax Is
FICA stands for Federal Insurance Contribution Act and is a compulsory tax which is levied on both employers and employees. It encompasses taxes for both Medicare and Social Security. Employers must withhold a portion for this tax from the paycheck of every employee, and must themselves make a contribution which matches it. As of this writing, employers withhold approximately 7.65 percent of their worker’s wages, and then the employer contributes another 7.65 percent, bringing the total to 15.3 percent.
Rate For Medicare Tax
The rate for Medicare tax is currently 1.45 percent. This means that 1.45 percent of the wages which are withheld from each worker will be put towards Medicare. Employers must then match it by contributing another 1.45 percent. Unlike other taxes, there is no threshold for taxable wages when it comes to Medicare. Actually, employees who make more than $200,000 per year must pay an additional 0.9 percent of their pay on top of the 1.45 percent that those earning less than $200,000 must contribute. Employers, by contrast, do not have to match the 0.9 percent for employees that earn in excess of $200,000 annually.
Tax Rate For Social Security
The current tax rate for Social Security is 6.2 percent. It is withheld from the gross earnings of each employee and employers must match it with an additional payment of 6.2 percent. However, this tax has a limit for its wage base. This essentially means that above a certain amount it is not necessary to withhold. Employers will only withhold 6.2 percent of their employee wages up until $127,000. Upon hitting this ceiling, employers must cease withholding taxes for Social Security, nor must they provide a matching contribution to it.
An Illustration Of How FICA Contribution Works
Let’s say one of your employees earns $4,000 every pay period. You must withhold 1.45 percent of their wages for taxes (Medicare) which would be $58 (4000 x 0.0145). An additional 6.2 percent of wages must be put towards taxes for social security, which would be $248 (4000 x 0.062). Since you are withholding a total of $306, as the employer you must make a matching contribution of $306.
How Are These Taxes Used?
These taxes that are taken out of employee paychecks are applied to government programs that are used to provide special benefits to individuals who qualify. In particular, Social Security is designed to help employees who are retired, or who are disabled and unable to work. Medicare is used to pay for the healthcare of retirees. For companies that have lots of employees TRAXPayroll is the best software tool for quickly and seamlessly calculating these taxes.