What is FICA?

FICA, formerly the Social Security Act, was first established by President Franklin Roosevelt and Frances Perkins during the Great Depression in 1935. Initially, this served to create an "old-age" insurance program to help workers gain a pension following retirement. 

Over time, the program expanded to offer Social Security benefits for retired workers and their dependents, along with disabled workers and their dependents. In 1965, President Lyndon Johnson revised this law to fund healthcare benefits as well, known as the Medicare program. Notably, FICA taxes fund benefits for current workers and future benefits for workers when they eventually retire or meet other requirements. In April 2024, 72.228 million individuals received Social Security and Supplemental Security Income (SSI), and 76.2% of these individuals were above the age of 65. 

So, why is this relevant to you as a payroll provider? Essentially, FICA involves crucial payroll tax calculations that employers (i.e., your customers) trust you to handle—alongside Federal Unemployment Tax Act (FUTA) taxes and State Unemployment Tax Act (SUTA) taxes. If you get these wrong, the costs don't just include penalties from the Internal Revenue Service (IRS); it could also cost you customers.

How do you calculate FICA taxes in 2024?

FICA consists of some of the most important taxes levied on employers and workers, along with state and federal income taxes. These taxes are deducted from workers' paychecks, and employers match the contributions, which are then filed with the IRS.

FICA consists of two main parts: First, there’s the old-age, survivors, and disability insurance, also known as Social Security taxes. Then, there's the hospital insurance taxes, better known as Medicare taxes. Each of these taxes has its own rate, which we'll cover below:

Social Security withholding rates and wage base limit

The current tax rate for Social Security is 6.2% each for both the employer and the employee, adding up to a total of 12.4%. The Social Security tax has a wage base limit—the maximum amount of earnings subject to the tax for a given year—and for 2024, this limit is set at $168,600.

Medicare withholding rates

The current Medicare tax rate stands at 1.45% for both employers and employees, totaling 2.9%. However, as a result of the Affordable Care Act in 2013, there's an Additional Medicare Tax of 0.9% that applies when an individual's compensation or self-employment income—combined with their spouse's income if they're filing jointly—exceeds the threshold for their filing status in a calendar year:

In these situations, employers need to start withholding this extra tax amount during the pay period when the worker's wages exceed $200,000 and continue through the end of the year. 

Unlike regular Medicare tax, employers don't match the Additional Medicare Tax.

FICA and self-employment

The self-employment tax rate is 15.3%, split into two components: 12.4% goes toward Social Security, and 2.9% is for Medicare (hospital insurance). While you might think payroll taxes, including FICA, do not apply to your self-employed customers, they do—especially if the individuals have set up an LLC and pay themselves as workers.

Self-Employment Tax combines Social Security and Medicare taxes for individuals who work for themselves, similar to taxes withheld from employee paychecks by their employers’ payroll providers. Unlike employed workers, self-employed individuals calculate these taxes on their own using Schedule SE (Form 1040 or 1040-SR)—or you would do it for them if they're customers of your people tech or payroll platform. 

Unlike regular workers, self-employed individuals can also deduct the employer-equivalent portion of these taxes when calculating their adjusted gross income, bringing their overall taxable income down. However, this deduction doesn't apply to wage earners who might still have an employer-employee relationship, e.g., factory workers or restaurant servers.

Also, just like regular employees, self-employed people have to pay an additional 0.9% Medicare Tax if their income—combined with their spouse's if they file jointly—exceeds certain thresholds specific to their filing status, the same as the table above.

Exemptions and credits to FICA 

While most individuals, particularly American citizens, must pay Social Security taxes as a part of FICA, there are a few exceptions for certain groups. In these cases, the employers also don't have to pay Social Security or Medicare since they have no worker contribution to match.

For instance, members of some religious groups can be exempt from Social Security taxes if they formally give up their rights to benefits like hospital insurance. These members must belong to a group that opposes private death and retirement benefits and must provide for their needs like food, shelter, and medical care.

Foreign or international students, scholars, teachers, and researchers whose immigration status is considered nonimmigrant or nonresident alien usually don't have to pay these taxes. Similarly, foreign citizens working in the US for their governments, such as diplomats or consular officials, are also exempt. State and local government employees covered by a public retirement plan aren't required to contribute to Social Security either.

That said, while these groups can avoid Social Security taxes, exemptions from the Medicare portion of FICA are very rare. And self-employed individuals, regardless of exemptions, are responsible for paying the entire FICA tax through the self-employment tax.

How does FICA impact employee and employer tax returns? 

As we've mentioned before, both the employee and employer's share of FICA taxes is a mandatory tax, and it's absolutely essential to manage these calculations carefully. Employers need to accurately withhold, pay, and report these taxes every year—and as their payroll provider, it falls on you to ensure this happens.

Specifically, employers need to list the FICA taxes withheld from employees' paychecks and employer contributions on their quarterly payroll tax returns using Form 941. Also, employee contributions must be listed on the employees' Form W-2, while the employer’s contributions go on Form 941. Plus, when employers cover the employee's share of FICA taxes, such as through a tax equalization policy, the IRS considers this additional income to the employee and should report it on their W-2. 

If there's an overpayment of FICA taxes, employers can't simply claim a refund or tax credit. They first need to either reimburse the affected employees or obtain their consent before making a claim. To get a FICA tax refund for past years, employers must show that they've reimbursed employees or obtained their consent, unless they've made reasonable efforts that were unsuccessful.

FICA doesn’t have to be frazzling for you or your customers

Here's the takeaway: Ultimately, like any payroll tax, FICA taxes are something your people tech or payroll platform needs to calculate accurately to comply with IRS regulations. If you make an error, the consequences can be expensive for your customers—and, by extension, your business.

But if your payroll product is built on a solid foundation of compliance, you can have the peace of mind that you are well covered. Partnering with Symmetry to incorporate the Symmetry Tax Engine API into your platform will ensure that you receive accurate FICA employer and employee calculations up to the appropriate wage bases. In addition, Symmetry keeps up with all of the other numerous withholding taxes so that you can automate your payroll tax compliance. We already do this for industry-leading payroll platforms like Deel and Gusto—and can do it for you, too.

By working with Symmetry, you can rest easy about the nitty-gritty of payroll tax calculations and focus on what truly matters to you: innovating your payroll product and creating exceptional customer experiences.