The Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) are tax areas that payroll practitioners need to be aware of.
FICA. FICA provides for a federal
system of old age, survivors, disability, and hospital insurance.
Old age, survivors, and disability insurance is financed by the Social
Security tax. Hospital insurance is financed by Medicare tax. Social
Security and Medicare taxes are levied on both the employer and the
employee, and each is reported separately. The employer must withhold
and deposit the employee's part of the taxes and pay a matching amount.
Generally, employee wages are subject to Social Security and Medicare
taxes regardless of the employee's age or whether he or she is receiving
FICA tax rates. The tax rate for
social security is 6.2 percent (amount withheld) each for the employer
and employee (12.4 percent total). The Social Security wage base limit
is $127,200 .
Medicare tax rate. The tax rate
for Medicare is 1.45 percent (amount withheld) each for the employee
and employer (2.9 percent total). There is no wage base limit for
Medicare tax. All covered wages are subject to Medicare tax.
In addition to withholding Medicare tax at 1.45 percent,
employers must withhold a 0.9 percent Additional Medicare Tax from
wages the employer pays to an employee in excess of $200,000 ($250,000
for married taxpayers who file jointly; $125,000 for married taxpayers
who file separately) in a calendar year. An employer is required to
begin withholding Additional Medicare Tax in the pay period in which
the employer pays wages in excess of $200,000 to an employee and continue
to withhold it each pay period until the end of the calendar year.
Additional Medicare Tax is only imposed on the employee. There is
no employer share of Additional Medicare Tax. All wages that are subject
to Medicare tax are subject to Additional Medicare Tax withholding
if paid in excess of the $200,000 withholding threshold.
The amount of withholding for Social Security and Medicare
taxes is determined by multiplying each wage payment by the employee
tax rate. There are no withholding allowances for either tax.
FUTA. FUTA, with state unemployment
systems, provides for payments of unemployment compensation to workers
who have lost their jobs. Most employers pay both a federal and a
state unemployment tax. In contrast to FICA, only the employer pays
FUTA tax, and it is not deducted from the employee's wages.
There are three tests to determine whether an employee
is subject to FUTA: a general test, a head of household test, and
a test for farm workers. Each test applies to a different category
of employee and is independent of the others. If a test describes
the employer's situation, it is subject to FUTA tax on the wages paid
to employees in that category during the current calendar year.
Exemptions from FUTA. These types
of employment are most commonly exempt from FUTA:
• Certain agricultural labor
• Certain domestic service (household)
• Casual labor
• Employing family members
• Railroad workers
• Certain nonprofit organizations
• Religious teachers
• Students employed by schools or colleges
• Student nurses
• Newspaper carriers
General test. An employer is subject
to FUTA tax on the wages paid to its employees (not farm workers or
household workers) if this test is met using the preceding calendar
1. Wages of $1,500 or more were paid in any calendar quarter
2. One or more employees were employed for at least some
part of a day in any 20 or more different calendar weeks
Domestic employers test. Employers
of domestic employees must pay state and federal unemployment taxes
if they pay cash wages to household workers totaling $1,000 or more
in any calendar quarter of the current or preceding year. A household
worker is an employee who performs domestic services in a private
home, such as babysitters, caretakers, cleaning people, drivers, nannies,
health aides, yard workers, and private nurses. (See IRS Publication
15 for more information.)
Agricultural employers test. Employers
must pay federal unemployment taxes if (1) they pay cash wages to
employees of $20,000 or more in any calendar quarter, or (2) in each
of 20 different calendar weeks in the current or preceding calendar
year there was at least 1 day in which they had 10 or more employees
performing service in agricultural labor. The 20 weeks neither have
to be consecutive weeks, nor must they be the same 10 employees, nor
must all employees be working at the same time of the day.
Computing FUTA tax. The FUTA tax
rate is 6.0 percent. The tax applies to the first $7,000 employers
pay to each employee as wages during the year. The $7,000 is the federal
wage base. An employer's state wage base may be different. Generally,
an employer can take a credit against the FUTA tax for amounts paid
into state unemployment funds. The credit may be as much as 5.4 percent
of FUTA taxable wages. If an employer is entitled to the maximum 5.4
percent credit, the FUTA tax rate after credit is 0.6 percent.
Depositing FUTA tax. For deposit
purposes, employers should figure FUTA tax quarterly. Employers can
determine their FUTA tax liability by multiplying the amount of taxable
wages paid during the quarter by 0.6 percent. Employers should stop
depositing FUTA tax on an employee's wages when he or she reaches
$7,000 in taxable wages for the calendar year.
If an employer's FUTA tax liability for any calendar
quarter is $500 or less, the employer does not have to deposit the
tax. Instead, the employer may carry it forward and add it to the
liability figured in the next quarter to see if it must make a deposit.
If the employer's FUTA tax liability for any calendar quarter is over
$500 (including any FUTA tax carried forward from an earlier quarter),
the employer must deposit the tax by electronic funds transfer.
Employers must deposit
the FUTA tax by the last day of the first month that follows the end
of the quarter. If the due date for making the deposit falls on a
Saturday, Sunday, or legal holiday, employers may make the deposit
on the next business day. If the employer's liability for the fourth
quarter (plus any undeposited amount from any earlier quarter) is
over $500, the employer should deposit the entire amount by the due
date of Form 940. If it is $500 or less, the employer can make a deposit,
pay the tax with a credit or debit card, or pay the tax with the Form
940 by January 31. If the employer files Form 940 electronically,
the employer can e-file and e-pay (electronic funds withdrawal (EFW)).