FICA is composed of two taxes: Social Security and Medicare.
Social Security is calculated by multiplying an employee’s taxable wages by 6.2%. For example, if an employee’s taxable wages are $600 this week:
$600.00 x 6.2% = $37.20 (this amount would be deducted from the pay check)
There is a wage base limit for Social Security. For example, in the year 2019, this tax is calculated only on the first $132,900 that is earned.
The employer also pays this tax. They pay it at the rate of 6.2% and are subject to the same wage base limit ($132,900 for 2019).
The total amount sent to the IRS for Social Security tax in 2019 will be 12.4% of taxable wages (6.2% for the employee share plus 6.2% for the employer share, for a total of 12.4%). A specific formula is used when calculating the employer share of Social Security.
$600.00 x 12.4% = $74.40 (the total amount due for SS tax)
Medicare is calculated by multiplying an employee’s taxable wages by 1.45%. For example, if an employee’s taxable wages are $600 this week:
$600.00 x 1.45% = $8.70 (this amount would be deducted from the paycheck)
There is no wage base limit for Medicare.
This is a tax that also requires an employer contribution. Employers pay it at the same rate as the employee (1.45%). If the Medicare tax for the employee portion of the tax is $8.70, the employer’s Medicare tax amount is also $8.70.
The total amount sent to the IRS for Medicare tax is 2.9% of taxable wages (1.45% employee share plus 1.45% employer share is a total of 2.9%). A specific formula is used when calculating the employer share of Medicare.
$600.00 x 2.9% = $17.40 (the total amount of Medicare tax to be paid)
An additional 0.9% tax is required to be withheld on annual employee wages that exceed $200,000. There is no employer contribution for this tax.
There may also be a 3.8% Medicare tax on passive investment income, which is not a payroll tax and is different than the above tax.
FICA Employee Contributions
While employees will pay half of their FICA Social Security contribution, the situation changes if you are self-employed. 1099 contractors will need to pay both the employee and employer portion of the payroll taxes. Self-employed people can simply add or subtract 7.65% (half of the total FICA taxes, which include Social Security and Medicare) to calculate the difference between 1099 and W-2 hourly rates.
While differences in FICA contributions are the main variance between 1099 contractor and W-2 employee wages, there are other calculations you may need to consider, including salary, benefits, and industry-specific alterations. Our pay difference calculator resource is a great place to better understand these differences.
Exceptions to FICA Taxes
While most employees need to pay FICA tax contributions, there are a few notable exceptions, including some state and federal government employees. Most civilian federal government employees hired before 1984, for example, are covered by and pay the 1.45% Medicare tax but do not pay for Social Security retirement benefits. Around 25% of state and local government employees with a pension plan will also not have to pay the tax. Additionally, wages earned as an H-2A worker are not subject to U.S. Social Security and Medicare taxes.
For a full list of those exempted from FICA taxes, see the Social Security government website.
More About FICA Taxes
Understanding FICA and the FICA Tax Rate – Calculating FICA taxes is one thing, but understanding the system and process is another. This resource is a great place to start your research.
FICA Withholding Rates – FICA withholding rates are subject to change each year. Stay up to date on the most recent tax shifts.
Federal Tax Software for Small Businesses – Confused about how federal taxes apply to your small business? You’re not alone. Check out this resource to understand what you need to know.
Setting Up Employer Paid FICA – Once you’ve determined your FICA contribution responsibility, you might be confused as to how you should set up your payments. This will help.
Other State Taxes – Employee and/or Employer Taxes
Other state taxes that employees may be subject to are disability insurance, state unemployment, and local taxes. These taxes may also require an employer contribution.
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