Most American workers have had the shock of opening a paycheck to find the amount much smaller than expected. You wouldn’t be the first to wonder about FICA tax and why they get so much of your hard-earned money.
In 2021, the average American worker paid 28.4% in taxes from their wages. Paying taxes is a hard reality of being a worker and getting a paycheck.
Since FICA takes a big part of those taxes, you might wonder what it’s used for and how much is required to pay. While it seems you pay an awful lot, there is a FICA tax limit in 2023.
Read on to learn more about the FICA Tax limit and the FICA Tax rates for employers paying taxes on your behalf.
What Is FICA Tax?
Your employer calculates your hours or wages to figure out how much to pay you each pay period. They also take the required withholding taxes from your wages.
These are the different types of taxes you must pay, but your employer takes them and pays them on your behalf to the IRS.
FICA stands for Federal Insurance Contributions Act and was first enacted in 1935. FICA is part of the required withholding taxes. These are payroll taxes paid by both the employer and the employee equally.
It’s one of the reasons the employer is responsible for paying your part on your behalf. FICA includes two taxes, the Social Security tax, and the Medicare tax.
These taxes help to fund the Social Security benefits and Medicare insurance for health coverage when you’re a senior citizen.
Social Security Tax
The Social Security tax is the first part of the required FICA withholding taxes. An employer is required to pay 6.2% of each employee’s taxable gross wages, and the employee is also required to pay 6.2% of taxable gross wages.
Once an employer calculates the taxable gross income for a pay period, they remove the 6.2% for the employee and pay it to the IRS. They also pay 6.2% to the IRS on your behalf.
This is called the matching contribution required for employers. This must happen until an employee reaches the maximum wage base limit. This number is announced each year.
More on the FICA limit for 2023 shortly.
The second part of the required FICA tax is the Medicare tax. Employers are required to withhold 1.45% of each employee’s taxable gross wages for Medicare tax.
The employer also matches the 1.45% Medicare tax for the employee.
Unlike Social Security taxes, which have a limit, Medicare doesn’t have a limit after paying up to a certain amount each year.
Higher-wage earners pay what’s called an Additional Medicare Tax. This threshold number of paying more changes yearly, like the FICA limit with Social Security.
With each pay period, the employer must remove 7.65% of taxable gross income until an employee reaches the FICA limit.
Key Facts About FICA Tax
- FICA stands for Federal Insurance Contributions Act and is imposed by the Internal Revenue Service (IRS).
- All employed individuals are subject to FICA taxes and must have their employers withhold this amount from their wages.
- Social Security tax rate is 6.2 percent, with a limit of $128,400 of earnings that are subject to the tax.
- Medicare tax rate is 1.45 percent (no limit on earnings).
- Employers must match employees’ Social Security tax payments and contribute an additional 0.9 percent in Medicare taxes on income over $200,000 annually per employee.
- Self-employed individuals will pay both the employer and employee portion of FICA taxes, which totals 15.3 percent Social Security taxes plus 2.9 percent Medicare taxes – this is reported on Schedule SE (Form 1040) each year.
FICA Tax Limit in 2023
Each year the IRS announces FICA limits. This means an employee must continue to pay the required withholding amount for Social Security until their wage reaches the limit amount.
The IRS FICA limit for 2023 is $160,200. Until an employee’s wages reach $160,200, Social Security must be withheld at 6.2% of the taxable gross income.
Each year that the national average wage increases so does the limit for social security maximum limit for social security tax. In 2023, there was the highest jump ever at $13,200. This is more than double than previous year’s increases.
The Additional Medicare Tax kicks into effect when the wage earner reaches $200,000 in 2023. This means when the employee makes over $200,000, they must pay a 0.9% surtax on top of the other withheld taxes from their taxable gross income.
If filing a joint return, the surtax kicks in at $250,000; $125,000 for married taxpayers filing a separate return.
Wage Base Limits for FICA Tax
When an employer uses the term wage base limits, it refers to the maximum amount an employee must make before no Social Security taxes are withheld.
In 2023, that number is $160,200. Remember, there is no wage limit for Medicare, so the 1.45% of each employee’s taxable gross wages will need to continue to be withheld.
If an employee reaches the $200,000 threshold, then an additional 0.9% is withheld in Additional Medicare Tax.
There’s a scenario where an employee could end up overpaying FICA. Here’s how this could happen.
Employees work for one company and pay FICA during their tenure with the company. The company submits the FICA payment on behalf of the employee to the IRS.
Then the employee changes jobs. They could be near the threshold limit, and the new employer wouldn’t know how much they had already paid in FICA taxes.
Even if paying taxes for FICA exceeds the limit, the new employer is obligated to continue withholding those taxes since they don’t have access to how much has already been paid.
If an employee overpays, the IRS will know because both employers’ withholding has submitted the tax amounts. When the employee is filing taxes, the overage will show up.
The IRS will use the overage towards taxes due if the employee owes money. The overage amount will be refunded if they don’t owe money.
FICA Tax Exemptions
Nearly everyone is required to pay FICA, whether you’re a full-time or part-time employee.
There are just a few exceptions to the required withholding tax. Students who hold on-campus jobs are not required to pay FICA taxes.
Other exemptions apply to nonresident aliens, including foreign government employees and teachers. They don’t have to pay FICA taxes while working in the US.
Other Cases Where FICA Tax Exemptions are Allowed
- Earned income from some churches or religious groups may be exempt from Social Security and Medicare taxes in 2023.
- Certain foreign employees may also be exempt from Social Security and Medicare taxes, depending on their specific circumstances.
- Some workers who are considered self-employed may also qualify for an exemption if they meet certain criteria.
- FICA tax is not required for wages paid to certain service providers such as student workers, certain agricultural workers, newspaper delivery people, etc.
- In addition, some people with disabilities may be eligible for a disability exclusion from Social Security taxes.
Self-Employed and FICA Tax Rates
Remember, an employer is required to withhold the FICA tax and pay the matching amount. So, what happens when you’re self-employed? In this case, you’re both the employer and the employee.
The answer is simple in that you pay for both. As a self-employed worker, you’ll pay 12.4% for Social Security tax and 2.9% for Medicare Tax until your wage reaches the yearly limit.
If you’re a high-wage earner, then you’ll also pay the Additional Medicare Tax of 0.9%.
Important Details for Self-Employed
- Self-employed individuals must pay a self-employment tax of 15.3%, which is composed of 12.4% for Social Security and 2.9% Medicare taxes.
- The Social Security portion is capped, meaning that only earned income up to $132,900 are subject to the 12.4% rate in 2021.
- Medicare tax has no maximum limit, so all wages and net earnings from self-employment are subject to the 2.9%.
- Any wages over the maximum taxable amount still count towards the total number of credits needed to qualify for Social Security benefits at retirement age.
- If a person’s filing status is married filing jointly and they both have self-employment income, each taxpayer can deduct 50% of their self-employment tax on their federal income tax return as an adjustment to income.
- Self-employed individuals may also be subject to additional taxes such as state income tax and local taxes depending on what state or locality they live in.
Know the FICA Tax Limits & Rates for Your Business
The FICA limit in 2023 is set at $160,200 for employees. 2024 rates have yet to be released.
If you’re an employer, it’s important to keep up to date on these numbers. You also want to know about important tax advantages for your business. Contact us to learn more about the employee retention tax credit and other tax incentives.