The Federal Insurance Contributions Act (FICA) tax is a U.S. federal payroll tax imposed on both employees and employers to fund Social Security and Medicare programs.

Social Security provides financial benefits to retirees, disabled individuals, and survivors of deceased workers, while Medicare offers health insurance coverage primarily for those aged 65 and older. The FICA tax ensures that these essential programs have the financial resources needed to support eligible U.S. citizens.

How is FICA tax calculated?

FICA tax is divided into two components:

1. Social Security tax rate is 6.2% each for both employees and employers, applicable to wages up to a certain annual limit known as the wage base limit ($168,000 for 2024). 
2. Medicare tax rate is 1.45% each for employees and employers, with no wage base limit. Additionally, an extra 0.9% Medicare tax applies to individuals earning over $200,000 ($250,000 for married couples filing jointly).

Who is responsible for paying FICA tax?

Both employees and employers share the responsibility for paying FICA tax. Employers withhold the employee's share of the tax from their wages and contribute an equal amount. Self-employed individuals, however, pay both the employee and employer portions of the FICA tax through the Self-Employment Contributions Act (SECA) tax.

Are there any exemptions from FICA tax?

Certain groups are exempt from paying FICA tax, including specific religious groups, nonresident aliens, and student employees working for the school they attend. Additionally, some federal and state government employees who participate in alternative retirement systems may be exempt from Social Security tax but still subject to Medicare tax.

How does FICA tax impact employees' take-home pay?

FICA tax directly reduces employees' take-home pay because the tax is withheld from their wages. For example, an employee earning $50,000 annually would have $3,825 withheld for Social Security and Medicare taxes ($50,000 x 7.65%). This reduction in take-home pay is crucial for employees to understand when budgeting and planning their finances.

What are the compliance requirements for employers regarding FICA tax?

Employers must withhold the correct amount of FICA tax from employees' wages, match the withheld amount, and remit the total to the IRS. Employers are also required to report FICA tax on Form 941 (Employer's Quarterly Federal Tax Return) and provide employees with Form W-2 (Wage and Tax Statement) annually, detailing the amount of FICA tax withheld.

How does FICA tax apply to remote workers?

FICA tax applies to remote workers in the same manner as it does to on-site employees. Regardless of the employee's location, if they are working for a U.S. employer and receiving wages, both the employee and employer are subject to FICA tax. Employers must ensure proper withholding and remittance for remote employees, considering any state-specific tax regulations that may also apply.

What role does FICA tax play in global hiring?

When hiring international employees, U.S. employers must determine whether FICA tax applies. Generally, nonresident individuals working outside the U.S. are exempt from it. However, if a foreign employee works in the U.S. and meets residency requirements, the tax applies. Employers must carefully assess each situation to ensure compliance with both U.S. and international tax laws.

How can businesses ensure accurate FICA tax calculations?

Businesses can ensure accurate tax calculations by using reliable payroll software that automatically calculates and withholds the correct amounts. Regularly reviewing payroll processes and staying updated on changes to tax rates and wage base limits is also essential. 

What are the potential penalties for FICA tax non-compliance?

Non-compliance with FICA tax requirements can result in significant penalties for employers. These penalties may include fines, interest on unpaid taxes, and potential legal action. The IRS may also hold employers personally liable for the unpaid taxes. To avoid these consequences, employers must adhere to all tax regulations and deadlines.

How does FICA tax differ from income tax?

FICA tax and federal income tax are distinct in their purposes and calculations. FICA specifically funds Social Security and Medicare programs, while income tax supports a broader range of federal, state, and local government services. FICA tax rates are fixed percentages of wages, whereas income tax rates vary based on income levels and filing status. Additionally, FICA tax has no deductions or credits, unlike income tax.

How can employees verify the accuracy of their FICA tax withholdings?

Employees can verify the accuracy of their FICA tax withholdings by reviewing their pay stubs, which should detail the amounts withheld for Social Security and Medicare taxes. They can also compare these amounts to their annual Form W-2. If discrepancies are found, employees should promptly address them with their employer's payroll department to ensure correct withholdings and contributions.

Related concepts:

• Self-Employment Contributions Act (SECA) tax: Similar to FICA tax but applies to self-employed individuals who must pay both the employee and employer portions
• Form 941: A quarterly tax return form that employers use to report FICA tax withholdings and other payroll taxes
• Social Security Wage Base Limit: The maximum annual wage subject to Social Security tax, which is adjusted annually for inflation
• Additional Medicare Tax: A 0.9% tax on wages exceeding specific thresholds, applicable to high-income earners

Learn more about how Deel PEO can help you manage US payroll, benefits, and compliance.