You must pay taxes into Social Security if you work, whether it’s taken out of your paycheck or you pay it as part of the self-employment tax. The Social Security (FICA) tax rate is 12.4 percent as of 2021. Half of that or 6.2 percent is paid by your employer while you pay the other 6.2 percent. The Medicare tax takes an additional 2.9 percent, half paid by the employer and half paid by the employee, for a total of 15.3 percent.
What Constitutes FICA?
You’re responsible for deducting Social Security from your employees' pay if you have employees on your payroll. This is done under the provisions of FICA, the Federal Insurance Contribution Act. This tax helps fund both the employee’s future Social Security retirement income and their post-retirement health insurance, known as Medicare.
In addition to the 6.2 percent that goes toward Social Security, there’s also the 1.45 percent Medicare tax (half of 2.9 percent) for a total of 7.65 percent. As the employer, you're responsible for chipping in 7.65 percent toward each employee’s Social Security and Medicare account to reach a total FICA tax of 15.3 percent.
Calculate FICA Tax Deductions
Employers are responsible for making sure the correct taxes are paid out on every paycheck. This will be part of the payroll tax you calculate each pay period. There may also be state and local taxes that you’ll need to calculate in addition to FICA.
Multiply the employee’s taxable wages by the appropriate Social Security tax rates to calculate the FICA portion of an employee’s tax withholding. This should be done separately to get both the Social Security and Medicare portion of the tax.
An example of an employee with a paycheck of $600 would work out as follows:
- Social Security tax: $600 x 6.2 percent = $37.20
- Medicare tax: $600 x 1.45 percent = $8.70
You’ll need to match this contribution with $37.20 and $8.70 out of your own account.
Read More: How to Calculate Payroll Taxes
The Wage Base Limit
The FICA tax does have limitations. The Social Security tax portion has a “wage base limit” which only taxes a person’s annual income up to a certain amount. This Social Security wage limit changes from year to year to keep pace with inflation, so it’s important to keep track of it if you’re taking FICA tax out of an employee’s paychecks.
The wage base limit is $142,800 in 2021, increasing to $147,000 in tax year 2022. Social Security tax will only be paid on earnings up to these limits. The extra $1 is not subject to the tax if an employee earns $142,801, nor is any other income over $142,800 earned going forward through the end of the year. Social Security withholding should begin all over again beginning with the first pay period in the next tax year until the wage base is reached again.
The Medicare tax does not have a limit, so you would continue to pay Medicare taxes even when Social Security taxation has reached the wage base threshold.
What Are Payroll Taxes?
Medicare and Social Security aren’t the only taxes that apply to an employee’s taxable wages. As a business owner, the payroll taxes you’re responsible for remitting on each employee include the following:
- Federal income tax
- State and local income tax
- FICA taxes
- Federal and state unemployment taxes
Paying Payroll Taxes
Businesses should determine when and how to pay federal income tax from the start. This will become a little more complicated as you begin adding employees, but at least you’ll know whether to deposit your taxes monthly or semi-weekly. You’ll make monthly tax deposits for the first year. They're due by the 15th of each month.
Your payroll taxes will be subject to a “lookback period" from your second year forward. This is an estimate of your yearly taxes based on your total gross income payroll taxes for the previous year, ending on the most recent June 30. Either you or your tax professional will submit these taxes via electronic funds transfer using the Electronic Federal Tax Payment System.
FICA for the Self-Employed
The Federal Insurance Contributions Act applies to all wage-earning workers, regardless of employment status. You won’t have an employer to submit your Social Security and Medicare taxes to the Social Security Administration on your behalf if you're self-employed or run your own business. Paying these taxes not only keeps you compliant with tax laws, but it also ensures that you have money available to you when you’re ready to retire and claim your Social Security benefits.
Unfortunately, you won’t have an employer to match your contributions if you're self-employed. This means that you’ll have to pay the full amount yourself. This is referred to as the self-employment tax. It will be 15.3 percent of your taxable wages. If you earned $142,800 in 2021, you’ll pay 12.4 percent in Social Security tax on that amount. You’ll pay another 2.9 percent for Medicare taxes on the full amount that you earned.
But here's a bit of good news: You can claim a tax deduction for half the total self-employment tax you paid on that year's tax return.
Read More: What Are Self-Employed Taxes?
Paying Self-Employment Tax
The IRS requires that you make estimated quarterly tax payments over the course of the tax year if you expect to owe taxes of $1,000 or more, including income tax. This means four times a year – in mid-January, mid-April, mid-June and mid-September. You should submit a payment to the IRS equal to what you anticipate you’ll owe for that three-month period.
But how do you determine what you’ll owe? The IRS helps with that. IRS Form 1040-ES has a worksheet that walks you through the calculations, asking what your anticipated income and profits will be, then multiplying it by the appropriate tax rates to arrive at an amount. The form also includes a form you can submit with your payment if you choose to mail it in rather than pay it at IRS.gov/Payments.
Coronavirus and 2020 FICA Payments
The Coronavirus, Aid, Relief and Economic Security Act, also known as the CARES Act, gave employers some temporary relief on payroll taxes. Section 2302 allowed employers to defer paying their portion of Social Security taxes through December 31, 2020.
It's important to note that this is a deferral, not complete forgiveness. You’ll still be responsible for paying the taxes eventually. Half of the amount you deferred will be due on December 31, 2021, while the other half will be due on December 31, 2022.
Read More: Tax News: IRS Delays 2020 Payment Deadline
Employers are still required to take Social Security tax and Medicare tax from each employee’s wages, as well as match that amount for a total of 15.3 percent. This amount is paid as part of payroll taxes on a scheduled basis.
- IRS.gov: Topic No. 751 Social Security and Medicare Withholding Rates
- Paycor: How To Pay Payroll Tax
- IRS.gov: Self-Employment Tax (Social Security and Medicare Taxes)
- IRS.gov: Estimated Taxes
- IRS.gov: Pay as You Go, So You Won’t Owe: A Guide To Withholding, Estimated Taxes, and Ways To Avoid the Estimated Tax Penalty
- IRS.gov: 2020 Form 1040-ES
- IRS.gov: Paying Your Taxes
- IRS.gov: Deferral of Employment Tax Deposits and Payments Through December 31, 2020
- Social Security Administration: Contribution and Benefit Base
- IRS: Topic No. 554 Self-Employment Tax
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.