It’s a scenario all too familiar to business professionals: you hear about FICA tax for the very first time and you don’t know where to begin with understanding it. Don’t worry, you’re in the right place.
FICA is an acronym that stands for Federal Insurance Contributions Act. In a nutshell, it is a payroll tax that is jointly paid by both employers and employees. It is primarily used to fund Social Security and Medicare.
How Is FICA Tax Calculated?
The amount that a person or business will pay in FICA taxes depends on their income. As of the year 2023, the tax rate for Social Security is 12.4%, with 6.2% of the rate paid for by the employer and the remaining 6.2% by the employee. For Medicare, the rate is 2.9%, with 1.45% paid by the employer and the other 1.45% paid by the employee.
FICA Tax Deductions
Although employers are responsible for both the employer and employee FICA taxes, the employee’s portion is generally deducted directly from their paycheck. The employer is then responsible for paying their portion to the federal government. Additionally, most employees can take a deduction for FICA taxes paid on their tax returns.
The Benefits of FICA Tax
Payroll taxes such as FICA fund a variety of federal programs, from Social Security to Medicare. This money helps to support people who are retired and those who have become disabled, as well as the families of deceased individuals. Additionally, payroll taxes, such as FICA, can help to fund programs that assist low-income families in the United States.
In Summary
In the end, FICA taxes are an important part of the American economy, providing funding for a range of social programs and benefits. Understanding this tax and knowing how it works is key to managing and budgeting payroll costs for businesses.