Tax is a multifaceted issue, and one which every organization has to encompass efficiently and comprehensively to avoid repercussions.
One branch of this you need to get grips with is the concept of FICA taxes. Let’s outline the main facts and aspects of this in detail, so that you are able to both understand what’s involved, and remain compliant with relevant regulations as well.
What is FICA? Understanding the Basics
FICA stands for Federal Insurance Contributions Act. It’s a federal law that requires businesses to withhold payroll taxes from their employees’ wages and salaries.
As an employer, you must collect FICA taxes each time you pay your employee, whether through a salary or hourly wage, and send that amount directly to the IRS in order to fulfill your obligations under this law.
Additionally, employers are also required by law to match certain amounts paid into these funds via contributions made on behalf of their workers, as well as themselves.
If self-employed individuals or small business owners with no employees do not have any staff members working for them yet, they still need to make sure they take care of filing paperwork properly, so that all appropriate payments can be made in a timely manner throughout the year too.
The History and Purpose of FICA Taxes
FICA taxes have been in place since the 1930s, when they were first enacted as part of President Franklin D. Roosevelt’s New Deal legislation. The purpose behind these taxes was to ensure that all workers could rely on a stable retirement income from Social Security benefits once they reached their golden years.
As mentioned, employers are required by law to withhold a certain percentage — currently 7.65 percent for employees — from each paycheck, and submit it directly to the Internal Revenue Service so that Social Security contributions can be properly funded.
In addition, this money also helps fund Medicare coverage for retirees aged 65 and over who qualify for its services under federal eligibility requirements.
Who Pays FICA Tax and How Much Do They Pay?
FICA taxes are paid by all employees who earn taxable income in the United States. The current tax rate is 7.65 percent, which includes both Social Security and Medicare contributions.
Employers also pay an additional 6.2 percent on behalf of their employees, resulting in a total combined payroll deduction of 13.3 percent for each worker’s wages or salary. For those earning more than $200k annually, this rate increases to 2% for employers.
Self-employed individuals will need to take care of paying both portions themselves. However, they can deduct half from their annual federal income taxes if filing as sole proprietorships or LLCs.
How Does an Employer Calculate a Worker’s FICA Tax Liability?
An employer must calculate each employee’s FICA tax liability in order to accurately pay and report taxes. Generally, the easiest way is to subtract any pre-tax deductions from their wages or salary before calculating the total amount that needs to be paid over as part of payroll processing.
The remaining sum is then multiplied by 7.65 percent, or higher for those earning more than $200k annually, as mentioned. This will give you your employee’s FICA tax liability, which should be kept track of and reported at the end of each fiscal year.
When Are Payments Due for Self-Employed People with Respect to Their Own Accounts?
If you are self-employed and do not have employees, then it is important to understand when payments must be made in order to stay compliant with the FICA requirements.
All taxes owed by those filing as sole proprietorships or LLCs typically must be paid quarterly throughout the year on April 15th, June 15th , September 15th and December 31st, using IRS form 1040 ES (Estimated Tax). Failure to make these timely payments can result in stiff penalties.
What Happens When You Withhold Too Little or Too Much in Taxes from Workers’ Wages?
When it comes to FICA taxes, employers must ensure that they accurately calculate and then withhold the correct amount of taxes from each employee’s wages.
If too little is withheld, workers may find themselves owing back-taxes during tax season which can lead to serious financial consequences.
If too much is withheld, employees may be due a refund when filing their returns, but won’t receive this money until later down the line.
Therefore, it’s important for businesses to stay on top of payroll processing so as not run into issues with the IRS, or risk disrupting employee happiness.
What are Some Strategies Businesses Can Use To Reduce their Overall Tax Burden on Employees Related to Social Security and Medicare Contributions?
Business owners looking for ways to reduce their overall tax burden related to FICA taxes can take advantage of certain strategies.
One option is offering a retirement plan, as employers may be able to deduct contributions made by them or employees, with this money then going towards funding future benefits rather than being paid out immediately in wages or salaries.
Additionally, businesses may also consider setting up salary reductions plans, such as flexible spending accounts, which allow workers the ability to save pre-tax dollars that won’t be subject to FICA during payroll processing.
What Resources Exist For Those Seeking More Information About FICA?
If you’re looking for more information about FICA taxes and related topics, there are many resources available online.
The Internal Revenue Service has developed an extensive website which provides comprehensive guidance on all aspects of dealing with this law, from understanding tax rates to filing paperwork correctly.
Also, there is also a dedicated page covering frequently asked questions regarding FICA payroll deductions, as well as other useful publications such as the Employer’s Tax Guide which can be downloaded directly from their site.
Wrapping Up
The good news in all of this is that if you’re well prepared and committed to rigorous research, FICA taxes don’t need to be frustrating. It’s all part and parcel of a well managed payroll process, and will become second nature once you’ve got over the initial learning curve.
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HR Future Staff Writer
