The Federal Insurance Contribution Act (FICA) created a tax fund designed to assist retired citizens with income and medical coverage. Workers are required to contribute to the fund from their first date of employment, as are their employers. Contributions help cover Social Security and Medicare for those currently in retirement, and future workers will contribute to cover those currently contributing.
The FICA tax is actually comprised of two separate taxes - Social Security and Medicare. Employees are required to pay their share of these taxes via payroll withholdings, and employers must contribute additional funds on their behalf. Updated rates for 2013 were published in IRS Publication 15.
Social Security Rate
The total tax rate for the Social Security portion of FICA is 12.4 percent, which is evenly divided between employees and employers. Workers are required to contribute 6.2 percent of their wages through a withholding tax. Employers must pay in an additional 6.2 percent on behalf of each employee.
The Medicare tax rate is 2.9 percent. Similar to Social Security tax withholdings, an employee pays 1.45 percent of the tax through payroll withholding and the employer matches the other 1.45 percent.
Between the two taxes, an employee should have a total of 7.65 percent of his pay deducted for contributions to national retirement programs. The employer must match this amount, resulting in a total payment of 15.3 percent, half of which is paid by workers and half of which is paid by their employers.
Exemption Does Not Apply
FICA taxes must be withheld from an employee's pay even if he or she claims "Exempt" status. An exempt withholding status only applies to federal income tax withholding and does not extend to the FICA withholding rate.
Income Cap for Social Security Portion
Social Security contributions have a wage base limit. This means at a certain level of income, employees make no more contributions to the fund. Wage limits apply only on a year-to-date income basis. The limit increases each year to allow for inflation and income increases. As of 2013, the wage base limit is $113,700. When an employee reaches this threshold; both the employee and the employer stop making social security tax contributions.
The wage base limit only applies to Social Security taxes. Medicare taxes must always be withheld and matched regardless of the amount an employee earns during the year.
Employers must deposit amounts withheld from employee pay checks on a regular basis with the IRS. In most cases, an employer must make deposits on the 15th of each month to cover federal income, Social Security and Medicare taxes withheld from employees during the previous month, as well as company contributions for the same time frame.
Each quarter, an employer must reconcile the deposits made on Form 941. If all monthly deposits are calculated correctly and made on time, there should not be any tax due with the quarterly tax return. Depending on the size of a company's payroll, an employer may have to deposit more frequently than once per month, but the IRS will notify an employer of alternate deposit and filing requirements.