FICA Taxes Explained: A Guide for US Small Business Owners

FICA Taxes play a major role in ensuring compliance with federal tax regulations. These taxes fund Social Security and Medicare, which provide financial security and healthcare benefits to millions of Americans.

For business owners managing payroll, understanding FICA Taxes is essential—not only for compliance but also for maintaining smooth payroll operations. Many small businesses turn to payroll tax services to simplify tax withholding, deposits, and filings, ensuring accuracy while reducing administrative burdens.

This guide covers everything you need to know, from tax rates to filing requirements.

What Are FICA Taxes?

The Federal Insurance Contributions Act (FICA) requires employers and employees to contribute to Social Security and Medicare, ensuring financial protection for retirees, disabled individuals, and those in need of healthcare.

Key Points:

• FICA Taxes apply to wages earned by employees.
• Employers withhold and contribute an equal portion.
• Self-employed individuals must cover the full amount under SECA (Self-Employment Contributions Act).

Breaking Down FICA Taxes

Understanding the individual components of FICA Taxes helps ensure accurate payroll processing and compliance.

Social Security Tax

• Rate: 6.2% for both employers and employees (totaling 12.4%).
• Wage Limit: Applies to earnings up to $176,100 in 2025. Earnings above this are not taxed for Social Security.

Medicare Tax

• Rate: 1.45% for both employers and employees (totaling 2.9%).
• Wage Limit: No cap—this tax applies to all earnings.

Additional Medicare Tax

• Rate: 0.9% (applies only to employees, not employers).
• Wage Threshold: Applies to earnings above $200,000 for single filers ($250,000 for married filing jointly).

How FICA Taxes Work

Since FICA Taxes are a shared responsibility between employers and employees, businesses must handle tax withholdings properly.

• Employers deduct the required portion from employee wages.
• Employers match the amount deducted.
• Deposits must be made through the Electronic Federal Tax Payment System (EFTPS).
• Form 941 (Employer’s Quarterly Federal Tax Return) is used to report FICA Taxes to the IRS.

FICA Taxes for Self-Employed Individuals

For those running a business without employees, FICA Taxes still apply under SECA (Self-Employment Contributions Act).

• Self-employed individuals pay both employer and employee portions, totaling 15.3% (12.4% for Social Security, 2.9% for Medicare).
• The Additional Medicare Tax of 0.9% applies if net earnings exceed $200,000.
• These taxes are reported on Schedule SE (Form 1040) when filing income tax returns.

Compliance and Deadlines for US Small Businesses

Staying on top of tax deadlines is essential for avoiding IRS penalties. Here’s what small business owners need to know:

• Deposit Frequency: Businesses must deposit FICA Taxes based on payroll size (semiweekly or monthly).
• Quarterly Reporting: Employers file Form 941 every quarter.
• Annual Reporting for Small Employers: Some small businesses may qualify to file Form 944 (once per year instead of quarterly).

Tips to Manage FICA Taxes Efficiently

Navigating payroll taxes doesn’t have to be overwhelming. Here are some best practices to keep your business compliant:

• Use Payroll Software – Automating payroll calculations ensures accurate tax withholding and prevents errors.
• Consult a Tax Professional – Working with an experienced financial adviser can help you avoid compliance issues.
• Monitor Deadlines – Keep track of filing and deposit due dates to prevent penalties.
• Understand Exemptions – Certain employees, like student workers or religious organization employees, may be exempt from FICA Taxes.

Summary

For US small businesses, properly handling FICA Taxes is an essential part of payroll management. These taxes fund Social Security and Medicare, ensuring future financial security for employees. Business owners must correctly withhold, match, and deposit these taxes while also meeting IRS filing deadlines.

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