FICA and Medicare taxes: A quick guide for employers

If you have — or plan to have — employees in the US, you may be aware of FICA and Medicare taxes. These social contributions are a significant part of your and your employees’ tax obligations, and fund health, retirement, and other key benefits to millions of US citizens.

In this article, we’ll discuss how FICA and Medicare taxes work, what the limits and exemptions are, and how to deal with accidental FICA overpay. We’ll also provide some best practices for managing FICA and Medicare taxes, and helping your employees plan for them.

What are FICA and Medicare taxes?

The Federal Insurance Contributions Act (FICA) tax is a federal payroll tax that funds Social Security and healthcare programs. It is split into two components: Social Security, and Medicare.

The funds generated by these taxes provide benefits for a wide range of people, including retirees, disabled individuals, and dependents of deceased individuals. 

In the 2023 fiscal year, the federal government collected over $4 trillion in taxes, with FICA taxes making up a third of that amount.

Is FICA tax the same as federal income tax?

No. Both are deducted from an employee’s paycheck, but serve different purposes and are calculated differently. Federal income taxes fund the US government’s general budget. 

Who pays FICA taxes?

FICA contributions are split evenly between the employer and the employee. Self-employed individuals (such as independent contractors) must also pay FICA taxes, although they are responsible for the full amount. 

How does the FICA tax work?

FICA taxes are calculated based on each employee’s gross wages for the pay period. As the employer, you withhold the employee's share (7.65%) directly from their paycheck. 

If your employee earns more than $200,000 per year, you must also withhold an additional 0.9% of Medicare tax.

The deducted amounts are reported and paid to the Internal Revenue Service (IRS), usually semi-weekly or monthly.

To see a full breakdown of employment costs for your hires in each state, check out our free Cost Calculator tool.

What is the FICA tax rate in 2024?

As of 2024, the combined rate for Social Security and Medicare taxes under FICA is 7.65% for each party (at a total rate of 15.3%). 

Of these, 6.2% is allocated to Social Security (on income up to a certain limit) and 1.45% to Medicare (with no income limit).

What are the FICA tax limits?

The FICA tax wage base limit is a cap on the amount of an individual's income that is subject to the Social Security portion of the FICA tax. There is no wage base limit for the Medicare portion of FICA taxes.

For Social Security, once an individual's earnings exceed the wage base limit in a given year, no further Social Security taxes are deducted from their income for the remainder of that year.

The 2024 wage base limit is $168,600. This means that any income earned above this amount in 2024 is not subject to Social Security taxes (although it is still subject to Medicare taxes).

This limit is adjusted each year based on national changes in wage levels.

The purpose of the wage base limit is to cap the amount of income that contributes to the Social Security system. This reflects the program's intention to provide a foundation of retirement security rather than proportionally reflect all of an individual's lifetime earnings in their benefits.

Who is exempt from FICA taxes? 

Although most US-based employees pay FICA taxes, there are some exemptions for certain groups. These include: 

• Eligible students who are employed by the school they are attending. 

• Members of recognized religious groups that oppose insurance benefits such as Social Security and Medicare (provided they have officially waived their rights to these benefits).

• Foreign government employees and employees of international organizations in the US under certain visas. 

• Certain non-resident aliens, such as international students on F-1, J-1, M-1, Q-1, or Q-2 visas.

What happens if FICA taxes are overpaid? 

If your employee works multiple jobs, they may end up overpaying on their Social Security taxes. If this happens, they can claim the excess payment as a credit on their federal income tax return, using IRS Form 1040.

 Overpayments are less common for Medicare, but they can still occur due to calculation errors. Again, your employee can claim the excess as a credit on their tax return.

Do independent contractors pay FICA taxes? 

As mentioned, US-based self-employed workers (including independent contractors) also have to pay FICA taxes on their income. However, employers are not required to withhold FICA taxes (or indeed any taxes) on the fees they pay to contractors.

Instead, contractors file and pay these taxes themselves under the self-employment tax. This covers both Social Security and Medicare contributions.

Unlike employees, contractors must also pay the full 15.3% FICA rate themselves, although they can deduct half of this tax as an adjustment to income on their tax return. Of this amount, 12.4% is earmarked for Social Security (up to the taxable wage limit) and 2.9% for Medicare (with no wage limit).

Contractors calculate this tax by using Schedule SE, which is filed with their Form 1040 during their annual tax returns.

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Managing FICA taxes 

As an employer, your main duty is to ensure you are fully compliant with all IRS regulations. However, you should also support your employees and contractors in their financial planning by providing clarity around these taxes. 

Here are some actionable tips to help you navigate both of these responsibilities.

FICA best practices for HR and accounting professionals

When dealing with FICA taxes, consider the following:

1. Stay updated on tax rates and wage base limits

Make sure you're aware of the current FICA tax rates and the Social Security wage base limit. These figures can change annually, so it’s important to know the amount that needs to be withheld from employee paychecks.

When you work with an experienced HR partner like Remote, our US experts ensure that you are fully aware of any upcoming changes.

2. Use reliable payroll software

Use payroll software that updates these changes to tax rates and wage base limits. Remote’s payroll software does this automatically, so you don’t need to waste time or resources recalculating everything. This reduces the risk of errors in your payroll and helps ensure you stay compliant with current laws.

3. Conduct regular payroll audits

Periodically review your payroll processes to verify that your FICA tax withholdings and payments are accurate. Catching and correcting errors early can prevent penalties and interest charges from the IRS.

Again, Remote’s payroll software makes payroll audits quick and easy.

Helping employees and contractors plan for FICA taxes

Since FICA taxes are a significant portion of a team member’s paycheck, it’s also a good idea to help them plan so they’re fully prepared come tax time.

Consider helping your people by adopting the following practices:

1. Provide clear information on FICA tax obligations

FICA taxes may come as a surprise to some employees and independent contractors.

It’s good practice to offer resources or workshops that explain how FICA taxes are calculated and what they fund. Knowledgeable team members are more likely to appreciate the value of these pay deductions.

Also, clarify the difference in tax obligations for employees versus independent contractors. For instance, your contractors should understand that they are responsible for paying both the employee and employer portions of the FICA tax.

2. Offer tax planning assistance

Consider providing your people with access to tax planning services. This is especially helpful for those who are nearing the Social Security wage base limit, or those who have additional income streams. Adjusting these individuals’ withholdings can prevent overpayment of taxes.

3. Educate your high earners on additional Medicare tax

Employees earning over $200,000 should be aware of the additional Medicare tax and how it may affect their tax obligations and financial planning.

4. Highlight tax deduction opportunities for independent contractors

Work closely with your US-based contractors and inform them about the deduction for the employer-equivalent portion of their self-employment tax. This deduction can significantly reduce their taxable income, so they’ll likely be grateful to be made aware of this option.

Manage your FICA tax obligations with Remote 

For employers, calculating — and staying up to date with — FICA taxes can be a challenge.

Our Payroll software does all of this for you automatically, and our US payroll experts ensure that you’re fully aware of any upcoming changes. This saves you time and resources, and allows you to plan your employment budget accordingly.

To learn more about how we can simplify your payroll tax management — and your wider HR processes — speak to one of our friendly experts today.

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