The Federal Insurance Contributions Act tax, more commonly known as the FICA tax, is imposed on working individuals by the Federal Government to pay for Social Security and Medicare coverage for eligible individuals.
What are FICA Taxes
FICA taxes are paid by employees and employers alike through mandatory payroll deductions. Employees are only required to pay a certain amount into the FICA tax account over the course of a working career, and the amount paid into the tax is directly related to the amount of benefits an individual will receive once he or she retires, or in the case that the individual becomes disabled. One of the main areas funded by the FICA tax is Social Security, which pays benefits to retired individuals over the age of 65, or people who otherwise qualify for Social Security benefits. Only hospital insurance is funded by the Medicare tax, which is technically considered a division of FICA.
Tax Rate
A set rate of an employee’s pay is collected by FICA—as a rule, this tax usually does not reach a level beyond 7.65% of an individual’s gross earnings (the amount a person makes before additional deductions begin to apply). 6.2% of the monies collected are divided to Social Security, with the remaining portion funding the Medicare system. Refunds are available when people who work more than one job pay more in a given year into the system than that which is required. Claims for tax returns can be made on an individual’s 1040 statement when filed with the IRS. Medicare, unlike Social Security, has no cap or limit as to how much may be paid in. In a given year, all money earned by an individual is subject to the 1.45% Medicare tax.
Paying FICA Taxes
Employers are required by law to remit FICA taxes to the Internal Revenue Service monthly and in a timely fashion. The only exception that applies to this rule is if a small business withholds less than $500 in a given month in FICA taxes; in such instances, remittance need only occur quarterly. FICA payments are required by the government to be declared every year on an individual’s W-2 form, to be sent to the SSA (the Social Security Administration) before February 1st every year.
If FICA taxes go unpaid, even in the cases of small business owners who have gone bankrupt, the IRS may apply penalties to an employer. A business owner or business accountant is personally responsible for up to 100% of these taxes. Certain small businesses and partnerships are offered FICA exemptions if the conditions for exemption are met.