Most Americans have experienced the shock of opening a paycheck to discover a significantly smaller amount than anticipated. You are not the first person to question the FICA tax and why they take such a large portion of your hard-earned money.

You might be curious about what FICA is utilized for and how much is required to pay because it consumes a significant portion of those taxes. Although it may seem like you pay a lot, there will be a FICA tax cap in 2023.

FICA Tax: What Is It?

To determine how much to pay you each pay period, your company figures out your hours worked or wages. Additionally, they deduct the necessary withholding taxes from your pay.

These are the many taxes you are required to pay, but your employer collects them and sends the money to the IRS on your behalf.

The Federal Insurance Contributions Act, or FICA, was initially passed in 1935. The compulsory withholding taxes include FICA. These are payroll taxes that are equally paid by the company and the employee.

It’s one of the reasons the employer must cover your portion of the cost. The Social Security tax and the Medicare tax are two taxes that are included in FICA.

These taxes contribute to the funding of Medicare insurance for elderly citizens’ health coverage as well as Social Security benefits.

Tax on Social Security

The first component of the necessary FICA withholding taxes is the Social Security tax. 6.2% of each employee’s taxable gross wages must be paid by the employer, and 6.2% of taxable gross wages must be paid by the employee as well.

After determining the taxable gross income for a pay period, an employer deducts the 6.2% for the employee and pays the difference to the IRS. Additionally, they pay the IRS 6.2% on your behalf.

This is referred to as the needed matching contribution from employers. This must continue up until the employee reaches the upper limit of the wage base. Each year, this number is released.

Healthcare Tax

The Medicare tax is the second component of the compulsory FICA tax. For Medicare tax purposes, employers must deduct 1.45% of each employee’s taxable gross pay.

Additionally, the company matches the employee’s 1.45% Medicare tax.

Medicare doesn’t have a cap after paying up to a specific amount each year, unlike Social Security taxes which do.

People with higher incomes must pay what is known as an Additional Medicare Tax. In line with the FICA cap for Social Security, this threshold amount for paying extra varies every year.

2023 FICA Tax Limit

The IRS releases the FICA ceilings each year. This means that until their compensation hits the limit amount, an employee must continue to pay the required Social Security withholding amount.

For 2023, the IRS FICA ceiling is $160,200. Social Security contributions must be deducted at a rate of 6.2% of the employee’s taxable gross income up to $160,200.

The maximum Social Security tax cap rises in lockstep with annual increases in the average national wage. The biggest increase ever occurred in 2023, reaching $13,200. The increases from the prior year are more than doubled by this.

Limits on the Wage Base for FICA Tax

The phrase “wage base limits” is used by employers to describe the highest salary an employee can earn before Social Security taxes are not deducted.

That sum will be $160,200 in 2023. The 1.45% of each employee’s taxable gross wages will still need to be withheld because Medicare has no upper wage limit.

When an employee’s salary exceeds $200,000, an extra 0.9% is deducted as Additional Medicare Tax.

Taxes Paid in Excess

There is a chance that an employee will overpay FICA. Here is how it might take place.

• Employees are employed by a single employer and make FICA payments while they are there. On behalf of the employee, the employer submits the FICA payment to the IRS.
• The individual then switches employment. The new employer might not be aware of how much FICA taxes they have already paid, even though they may be close to the threshold level.
• The new employer is required to continue withholding those taxes even if the amount paid for FICA exceeds the cap because they are unaware of the exact amount.
• Because the IRS has received the tax amounts from both companies’ withholding, it will be aware if an employee overpays. The overage will appear on the employee’s tax return.
• If the employee owes taxes, the IRS will apply the excess toward those obligations. If they are not owed any money, the excess amount will be returned.

Exemptions from FICA Tax

Regardless of whether you work full- or part-time, almost everyone is expected to contribute to FICA.

Only a few situations are exempt from the mandatory withholding tax. Students who work on-campus are exempt from FICA taxes.

Rates of Self-Employed and FICA Tax

Keep in mind that an employer must deduct the FICA tax and pay the matching sum. So what occurs when you work for yourself? You are both the employer and the employee in this situation.

Until your income surpasses the yearly cap, you as a self-employed worker will pay 12.4% in Social Security tax and 2.9% in Medicare tax.

You will additionally pay the 0.9% Additional Medicare Tax if you make a high income.

Understand the FICA Tax Rates & Limits for Your Business

Employers must stay current on these figures. Additionally, you need to be aware of significant tax benefits for your company. To find out more about the employee retention tax credit and other tax benefits, get in touch with Your Part Time Accountant.