What Small-Business Owners Need to Know About FICA Taxes
Owning a small business comes with a lot of technicalities, including everyone’s favorite headache: taxes. When calculating how much you and your employees owe each paycheck, the FICA tax is an important piece of the puzzle. Let’s delve into what exactly this contribution entails and what small business owners need to know.
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What is FICA tax?
What is FICA Tax? The FICA tax is part of Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program. Specifically, FICA stands for the Federal Insurance Contributions Act — an act created in 1935 as a way to create Social Security funds for American workers. In 1966, the Medicare tax was included under this umbrella, and today the FICA tax includes both Social Security and Medicare contributions.
In 2022, the total FICA tax rate was 7.65%, which includes 6.2% to Social Security and 1.45% toward Medicare. For 2023, these numbers remain the same — but the taxable minimum has risen from $147,000 to $160,200. This means that any earnings above this threshold should not be taxed toward Social Security. However, earnings over the taxable minimum are still subject to Medicare taxes.
Single filers who make over $200,000 and joint filers over $250,000 are also required to pay an additional Medicare tax of 0.9%, as per the Affordable Care Act of 2013.
Small business owners should be aware of the FICA tax because as an employer you are responsible for withholding and matching your employee’s contribution. If you own a business, you will contribute a total of 15.3% to FICA taxes.
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How to calculate FICA tax
To calculate FICA tax, simply multiply gross earnings by 7.65%. Again, this percentage includes 6.2% toward Social Security and 1.45% toward Medicare tax. As an employer, you’re required to pay FICA tax by matching your employee contributions, resulting in a combined total of 15.3%. For sole proprietors or the self-employed, you’re required to pay the full amount of 15.3% (employer and employee) on your own gross earnings.
Those who earn more than $200,000 (or $250,000 for joint filers) are also required to pay an additional Medicare tax of 0.9%.
Payroll software that can help
To make life easier, consider using a payroll software that automatically calculates FICA deductions. There are several options available for small business owners, including free payroll software programs.
These programs can also help you keep track of other deductions for both you and your employees.
FICA tax exemptions
Not everyone is required to pay FICA tax toward Social Security and Medicare. Exempt parties include:
- Some religious organizations and employers
- Certain state and local government organizations
- Children under the age of 18
- College students
It’s important to note that anyone who is exempt from FICA taxes will not receive the associated benefits. This is why some organizations offer pensions in place of Social Security benefits.
FICA tax vs. income tax and payroll tax
When so many categories are withheld from a paycheck, it can be hard to keep track of all the terminology. We’re here to help.
- Payroll tax is an umbrella term typically used to refer to the main withholdings determined by your employer or the government.
- When talking about payroll tax, people are usually referring to FICA tax (a set 7.65%) and income taxes (dependent on your tax bracket and W-4 filing).
- Income taxes are withheld by federal and state governments to fund public programs and services.
When is FICA deductible in a tax return?
If you are a solopreneur or self-employed, you are responsible for paying FICA taxes as an employer and employee — meaning you’ll have to pay twice the standard rate of 7.65%. However, the “employer” half is deductible, and you can write off that extra 7.65% when filing annual taxes.
You might also see money related to your FICA tax contribution on a tax return if you paid into Social Security on income over the $147,000 taxable minimum.
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While the FICA tax may not be something you’re familiar with, it’s important to know that this act requires you (as an employer) and your employees to contribute 7.65% of your gross earnings every year. These contributions go toward Social Security disability insurance, and the Medicare tax, and should be taken out of each paycheck on top of federal and state income taxes. A great way to stay on top of FICA withholdings is to use a payroll software that automatically calculates deductions, and to double-check your work with an accountant or accounting software.
Be sure to stay up to date, as FICA rates can change from year to year.
Want to learn more about calculating small-business taxes? Check out our guide on how to file small business taxes.
FICA tax FAQ
FICA taxes include the Social Security tax of 6.2% (on wages up to $147,000), and 1.45% toward the Medicare tax. Both employers and employees are each responsible for paying this combined 7.65% of gross earnings for a total of 15.3%.
If you are not FICA exempt, you are required to pay FICA tax on the taxable minimum of $147,000 (2022). Exemptions include religious organizations, children under the age of 18, university students, and certain local and state government positions.
FICA tax is not the same as income tax. FICA tax includes a fixed percentage (7.65%) for Social Security and Medicare contributions, while the amount of federal income tax withheld from your paycheck depends on your W-4 form and income tax bracket.
If you are a sole proprietor, you can write off the employer half of your 15.3% FICA tax, and you should see that half of your FICA contribution in your tax return. You might also receive money related to FICA in your tax return if you have made Social Security payments on earnings over $147,000.
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