The IRS requires employers to make deposits of federal income tax withheld from employee paychecks and FICA taxes, or Social Security and Medicare taxes, semiweekly or monthly. Employers must also send the IRS a quarterly payroll tax report (Form 941).
Award winners may use the rule of administrative convenience or the lag method to delay including the awards in their income for FICA purposes.
How FICA Taxes Affect Your Paychecks
Payroll taxes can have a bad reputation for being complex and intimidating, but they’re pretty simple. The IRS requires small business owners to withhold federal, state, and local employment taxes from their paychecks. This includes FICA taxes, which stand for Federal Insurance Contributions Act and help fund the Social Security and Medicare programs.
Employers are responsible for withholding these FICA taxes from their employee’s wages, and they also have to pay their share. The total rate is 15.3%, and it’s divided into four parts:
- The Employee Contribution to Social Security
- The employer contribution to Medicare
- An additional 0.9% tax for high-income earners
The amount of these taxes varies by the type and level of earnings. Still, using tools like ADP, you can calculate them on a per-paycheck basis using your employee’s wage details, including the number of pay periods and their gross amounts. Once you know the taxable wages, multiply that by the applicable tax rates and subtract any withholding exemptions your employee may have selected.
As the employer, you must report and deposit these FICA payroll taxes every quarter through Form 941. The IRS provides detailed instructions on filing this form and calculating your FICA taxes and the quarterly deposit deadlines. To avoid penalties and interest, it’s best to work with a qualified accountant or payroll service who can ensure your taxes are calculated accurately, withheld appropriately, and paid on time.
Social Security Tax
FICA taxes — the Federal Insurance Contributions Act taxes that fund Social Security and Medicare benefits for workers — are a critical component of payroll tax calculations—knowing how these taxes work allows you to ensure that your employees are being adequately withheld on a paycheck-by-paycheck basis. It also helps you track how much you owe at tax time as an employer. And, if you choose to use a payroll service that offers an integrated solution, you can simplify your payments by automatically calculating and depositing these necessary payroll taxes.
While the lines between independent contractors and employees are not always clear-cut, most workers are taxable. The IRS has rules that help distinguish between these two types of workers, including behavioral, financial, and relationship tests. Once you know which workers qualify as taxable employees, you can calculate their FIT withholding using their W-4 information.
Social Security payroll taxes apply to a worker’s earnings up to the maximum taxable amount, which is set by law and rises annually. Because wage inequality has caused wages to grow more rapidly than the maximum, lawmakers are considering ways to expand Social Security’s taxable income base. They could raise the wage threshold or introduce a Medicare tax on high earners. However, these changes would require legislation and a long delay before they take effect.
Medicare Tax
Like all federal and state payroll taxes, FICA taxes — or the Federal Insurance Contributions Act tax — must be withheld from employee paychecks and paid by employers and employees. These are “insurance” taxes, so they help to fund the Social Security and Medicare programs that deliver benefits to people who have earned them. The FICA tax rate is 7.65 percent of an employee’s taxable earnings, and employers and employees are responsible for paying this amount.
Your business’s withholding for FICA taxes will depend on the information your employees supply on their W-4 forms or other similar state and local income tax forms. Generally, nearly all employee payments are subject to FICA taxes, including wages, salaries, commissions, and fees. However, there are some exceptions to this rule. For example, reimbursements for mileage that do not exceed the IRS mileage rate and some employer-paid health and retirement plan contributions are nontaxable. See IRS Publication 15 for a complete list of the rules and exceptions for these employee payments.
As a small business owner, you are responsible for collecting and depositing all payroll taxes, including FICA. As such, it’s essential to understand the basics of these taxes, including their definitions and how they’re calculated. For instance, Social Security taxes are only withheld from an employee’s wages up to a certain amount each year, known as the Social Security wage base, and this figure increases most years due to inflation. The same is true of Medicare taxes, although high-income earners will have to pay an additional 0.9% of Medicare tax on their income over a particular threshold.
Unemployment Tax
The IRS requires employers to withhold Social Security and Medicare taxes (FICA tax) from employees’ wages and pay the matching amount to the government. For a small business owner, this is a critical responsibility that, if not fulfilled correctly, can lead to penalties and civil or criminal charges.
Aside from FICA, employers also must withhold federal income taxes from employee paychecks and deposit these funds semiweekly or monthly. As a result, calculating payroll taxes requires attention to detail and familiarity with different forms, deposits, and filing requirements at the local, state, and federal levels.
For instance, you must know that the IRS broadly defines “wages” to include almost every type of compensation paid to an employee for services, whether a salary, hourly rate, commission, fees, or any other method. Further, the IRS provides special rules for certain payments like mileage reimbursements and cash earnings.
As the employer, you must deposit these employment taxes semiweekly or monthly, depending on your business’s filing frequency. You’ll also need to file quarterly payroll tax returns, known as Form 941. These reports reconcile the amounts deducted from your employees’ paychecks with the sum of the FICA and income taxes you owe to the IRS for that quarter. Often, a full-service payroll provider will make these tax deposits and submit these reports on your behalf.