What is FICA Tax?
The Federal Insurance Contributions Act, commonly referred to as FICA, is a federal law mandating employers withhold a specific percentage of each employee’s wages to help fund Medicare/Social Security programs. The total amount of FICA taxes going into Medicare and Social Security is split 50/50 between an employer and an employee.
Employee paycheck stubs will have individual boxes for FICA deductions. If you are self-employed, you pay the full FICA tax yourself.
Although the Supplemental Security Income (SSI) program is controlled by the U.S. Social Security Administration, it is not funded by FICA taxes. Instead, federal tax revenue funds the SSI program.
Are FICA Tax and Federal Income Tax the Same?
Although both are taxes paid to the IRS, only FICA taxes fund Medicare and Social Security programs. Federal income taxes, on the other hand, are the main source of revenue received and disbursed by the U.S. Treasury.
Federal income taxes fund social programs like supplemental nutrition assistance (SNAP and WIC), national infrastructure projects, and many other government services.
Do Employees and Self-Employed Individuals Pay FICA Taxes?
Enacted into law in 1954, the Self-Employment Contributions Act (SECA) requires anyone who is self-employed and earns income to pay FICA taxes on their net earnings. Since self-employed individuals don’t receive a paycheck, most pay quarterly estimated taxes.
These quarterly tax payments are expected when you owe the IRS more than $1,000 at the end of the year. Self-employed pay 100% of FICA taxes since there is not an employer that pays half.
Employers withhold a certain percentage of FICA taxes from each employee’s paycheck. Employers then match the amount of FICA taxes paid by employees and pay this amount to the Social Security and Medicare programs. So as an employee, you pay 50% of FICA taxes.
How Much is the 2022-2023 FICA Tax Rate?
- FICA: Social Security Tax Rate: employees pay 6.2%, and employers pay 6.2%.
- FICA: Medicare Tax Rate: employees pay 1.45%; employers pay 1.45%
- Total FICA Tax Rate: 7.65% for employees and employers
- Total FICA Contribution by Employees and Employers: 15.3% (Note: self-employed pay the full 15.3% themselves)
The maximum Social Security tax for both employers and employees is $8,239.80. There is no maximum tax amount for Medicare.
There is an additional Medicare tax of 0.9% for single filers earning more than $200,000. This extra Medicare tax rate also applies to joint filers earning over $250,000.
What Happens If I Don’t Pay FICA Taxes?
Employers may be subject to unpaid payroll tax penalties if they fail to collect and/or remit FICA taxes. Penalties range from 2% to 100% of any unpaid tax if the IRS determines an employer willfully ignored FICA withholding requirements.
The most common reason for the IRS to penalize employers is failing to file Form 941.
A maximum penalty of 15% is issued to employers who do not remit payment within 10 days of receiving an initial notice of past due FICA taxes.
Employers failing to provide W-2s to employees or 1099s to contract employees or freelancers may also be subject to similar IRS penalties.
For self-employed, not paying self-employment FICA taxes will result in underpayment penalties as well as interest charges until the FICA tax is paid in full.
How Can I Get Help Paying FICA Tax Debt?
In some cases, the IRS may not penalize employers who are late on making FICA payments or have not reported FICA taxes. Employers must provide documentation for their inability to make or report FICA payments.
Exemptions include a natural disaster or fire damaging their business; a serious illness or death that prevented timely remittance of FICA payments; or an “unavoidable” absence of the employer (taxpayer) or their immediate family.
One way business owners can resolve past due FICA taxes is by submitting an Offer in Compromise to the IRS. Again, the employer must show proof of not being able to pay the full FICA amount and offer the IRS a partial amount that is reasonable and within their financial means.
When determining an employer’s eligibility for an Offer in Compromise, the IRS will evaluate the employer’s assets, liabilities, income, and expenses. If a business does not qualify for an OIC, owners can request an installment agreement.
Self-employed individuals can also submit an OIC to settle FICA back taxes for less. There is also a short-term payment plan to pay off the debt in 180 days, or a long-term installment agreement if more time is needed.
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