How to Calculate Your FICA Rate: Understanding the Federal Insurance Contribution Act
Social Security and Medicare benefits are largely funded by a tax on earnings. This tax, called FICA, which stands for the Federal Insurance Contribution Act, impacts employees, employers, and self-employed individuals. The tax for social security benefits began in 1935, and it now covers retirement benefits, benefits to workers' survivors, and disability benefits. The Medicare tax was added in 1965, helping to pay for medical coverage primarily for those aged 65 and older. Here's how to calculate your FICA rate.
What is FICA?
FICA is comprised of taxes for Social Security (referred to as Old Age, Survivors, and Disability Insurance, or OASDI) and Medicare.
- The tax rate for the Social Security portion is 6.2 percent on earnings up to a "wage base." The wage base for 2017 is $127,200; for 2018 it is $128,700. The tax rate is unchanged.
- The tax rate for the Medicare portion is 1.45 percent on all earnings; there is no wage base limit. The tax rate is 1.45 percent in 2017 and 2018.
The rate is applied to all taxable compensation. This includes salary, wages, tips, bonuses, commissions, and taxable fringe benefits. IRS Publication 15-B has a chart of various fringe benefits showing which are subject to FICA and which are exempt (see Table 2-1).
FICA is paid by employees and their employers. For example, an employee earns $130,000 in 2017. She pays FICA tax of $9,771 ($7,886 [6.2% of $127,200] + $1,885 [1.45% of $130,000]), none of which is deductible. Her employer pays an equal amount and deducts it as a business expense.
Self-employed individuals pay the employee and employer share (even though they are neither employees nor employers); it's called self-employment tax rather than FICA. One half of self-employment tax is deductible from gross income (no itemizing is required).
Each employer must withhold the employee's share and pay the employer's share of FICA for each worker on the payroll. However, if a corporation is related to another corporation and an employee works for more than one of these corporations, there's a tax strategy for the employer to save money, known as the common paymaster rule.
The parties are related if any of the following conditions are met:
- The corporations are members of a controlled group of corporations;
- 30 percent of employees of one corporation work concurrently for the other(s);
- Fifty percent of the officers of one corporation are also officers of the other; or
- If the corporation doesn't issue stock, then at least 50 percent of the board of directors of one corporation is on the board of directors of another corporation, or at least 50 percent of the voting power to select such members are concurrently held by holders of more than 50 percent with respect to the other corporation.
The corporations can designate which one is treated as the employer, referred to as "the common paymaster." This common paymaster is responsible for FICA on the employee's wages, regardless of whether the employee receives a consolidated payment at multiple corporations or several paychecks for this work. However, all corporations in the group remain jointly and individually liable for this payroll tax.
Additional Medicare tax
There is a 0.9 percent additional Medicare tax on earnings over a threshold amount (based on filing status):
- Married filing jointly: $250,000
- Single: $200,000
- Married filing separately: $125,000
This tax is paid solely by an employee; there is no additional tax on an employer. However, an employer must withhold the tax from an employee's salary or wages when this exceeds $200,000, regardless of the employee's filing status. Thus, if an employee earns $185,000 for 2017 and receives a year-end bonus of $25,000 payable before the end of 2017, the employer must withhold the 0.9 percent tax on $10,000 (the amount in excess of $200,000). This remains even if the employee is married, files jointly, and doesn't owe the tax (assuming the spouse's earnings do not push the couple over the $250,000 threshold). In this case the employee receives credit for the overpayment, which can reduce tax liability, and if more, receive a tax refund.
The threshold amounts are not adjusted annually for inflation.
Looking ahead, the FICA tax rate could increase to ensure the solvency of the Social Security system. However, currently there are no concrete proposals under consideration. In the meantime, you may want to consider working with a payroll provider if you need help managing your payroll tax responsibilities.