Understanding FICA and the FICA Tax Rate

Businesses of all sizes and every field should have a basic understanding of FICA. This tax, composed of two separate contributions, is deducted from employee payroll and paid to the relevant federal agencies. Without FICA, essential public services would fail to perform their functions; over time, they would cease to exist. It is up to you, the small business owner or employer, to transmit and document these contributions through accurate calculations and payroll processing. It can be a big responsibility, but one that takes little time and effort to complete properly when you have reliable software at your disposal.

Whether it’s your first time paying and documenting FICA payroll taxes or it’s been a while and you need a refresher course, here is the essential information needed to calculate and report FICA taxes to the IRS and SSA.

What is FICA?

FICA, known officially as the Federal Insurance Contributions Act, is composed of two separate taxes: Social Security and Medicare. The tax program is responsible for paying monthly benefits to more than 41 million retirees and more than 60 billion beneficiaries each month. It might not seem like your measly contribution makes an impact, but we promise: it does.

The FICA tax rate generally fluctuates each year, and the wage base will often shift by a couple thousand dollars. For 2018, the Social Security FICA tax percentage is 6.2% and the wage base is $128,700. This means approximately 6.2% of an employee’s taxable wages should be deducted and sent to the IRS each pay period. The wage base means that wages up to $128,700 are subject to the 6.2% tax.

The FICA tax rate for the Medicare portion is 1.45% for 2018, and there is no wage base limit. As with the Social Security portion, employers should send 1.45% of an employee’s taxable wages to the IRS. The calculations for both portions of the FICA tax are relatively simple, and the filing process can be straightforward, but most small businesses will still benefit greatly from our payroll software features.

Paying FICA as a Small Business Owner

Most small businesses have fairly slim profit margins, and paying the FICA tax rate each pay period can seem like an unfair imposition. Your employees work hard for their paychecks, and siphoning off a portion to the IRS can feel disappointing. Therefore, it is essential to maintain perspective during every pay period. Why is FICA important? Who does it benefit?

FICA was passed as part of the Social Security Act, the piece of legislation that created the program responsible for paying monthly benefits to retirees. Social Security is essential to America’s economic security, and 1 out of every 6 people rely on it for financial stability. Additionally, 2 out of 3 seniors depend on the program for most of their income. These benefits are modest but vital; the program lifts 20 million people out of poverty. In fact, without Social Security, around 45% of senior citizens would live below the poverty line.

Similarly, Medicare guarantees affordable health insurance. Before the program, almost 50% of senior Americans had no health insurance. Medical care was often paid out of pocket, which led to the decimation of savings accounts, reliance on children, and/or simply going without care. Medicare delivers a guaranteed level of coverage to people who might not otherwise be able to afford it. It is an essential service that many Americans need to survive.

So, while you may feel a pang of guilt subtracting that 6.2% from your employee’s paycheck, those funds are not shipped off to fund controversial government programs. Rather, they are used to sustain a large portion of the American population. Putting FICA in perspective makes the filing process just a bit easier, and AMS makes it nearly effortless.

Software Solutions from AMS

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