Whether you’re just starting out in your career or you’re approaching retirement age, planning for your future retirement is important. In the United States, the federal government has a few different programs designed to support people during retirement. FICA payroll taxes help support two of those programs, Social Security and Medicare.
Federal Insurance Contributions Act
FICA stands for Federal Insurance Contributions Act. It’s a law that requires you to make payroll contributions towards the federal government’s Social Security and Medicare programs. FICA tax is a payroll tax that is made up of equal employer and employee contributions to both Social Security and Medicare.
Social Security Tax
The Social Security tax rate is 6.2% of gross wages for both employers and employees in 2021. Social Security tax has a wage base. That means there is a limit for how much tax an individual can pay based on their wages. The wage base in 2021 is $142,800, so if you make more than that amount, you won’t owe Social Security tax on wages over $142,800.
As the name implies, Social Security taxes go towards funding Social Security benefits, which are also known as retirement, disability, and survivorship benefits.
The Medicare tax rate is 1.45% of gross wages for both employers and employees in 2021. Medicare tax doesn’t have a wage base, and in fact, there is an additional Medicare tax due for those who earn more than a given threshold.
Medicare taxes go towards hospital and Medicare costs. The Medicare program is also funded by other sources, like premiums, so it is not wholly dependent on these taxes.
Additional Medicare Tax
There is additional Medicare tax, also called Medicare surtax, due for high earners. The surtax is an additional 0.9%, for a total of 2.35%. For those who file taxes as a single person or head of household, the tax takes effect after they have earned $200,000.
For those who are married and file jointly, the tax takes effect after they have earned $250,000 jointly. The Medicare surtax has been in effect since 2013 and helps pay for some Medicare-related portions of the Affordable Care Act.
FICA vs. SECA
It is very important to the government that everybody pays their fair share into Social Security and Medicare, so they may take advantage of it when they retire. That is where SECA (Self-Employed Contributions Act) comes in.
SECA requires self-employed people to pay for Social Security and Medicare taxes as well. Self-employed individuals must pay both the employer and employee portion of these taxes. Many people think of SECA as FICA for the self-employed.
FICA and the CARES Act
The CARES Act allowed eligible employers to defer their share of FICA taxes on payroll paid out between March 27, 2020, and December 31, 2020. It did not allow for deferment of employee-paid FICA taxes.
If you are an employer who took advantage of this program, you must pay the FICA taxes back over the next two years. Employers have until December 31, 2021 to pay back half of the deferred taxes, and they have until December 31, 2022 to pay back the other half of the deferred taxes.
If this applies to you, it is a good idea to make a plan now to address how you will get the funds to pay back these FICA taxes.
A key part of payroll
FICA taxes are an essential part of payroll, as they are mandatory for both employees and employers to pay, and they are federal taxes, so they apply to everyone in the country. As an employer, it’s important to make sure that you are appropriately deducting FICA from your employees and contributing your own share of FICA as well.
FICA taxes are typically due quarterly with Form 941, and it’s important to be on time to avoid penalties.
If you use an online payroll provider, FICA taxes are something they can help with. Homebase offers an online payroll solution that syncs with your timesheets and makes payroll a breeze. Check out our payroll service to learn more.