Federal Payroll Taxes 101: Federal Insurance Contributions Act (FICA)

Federal payroll tax compliance is a core responsibility for every business, and one of the most significant obligations is the Federal Insurance Contributions Act (FICA). FICA helps fund Social Security and Medicare—two of the primary social insurance programs in the U.S.—making it a critical part of your overall employer payroll tax responsibilities.

Although FICA compliance may seem straightforward, it involves detailed calculations, precise withholding and reporting responsibilities, and strict deadlines that can be challenging to manage. In this article, we’ll walk you through the basics of FICA tax compliance, helping you understand how these taxes work, what’s required of you as an employer, and how you can stay on track while keeping your focus on growing your business.

What Is FICA: Social Security and Medicare

The Federal Insurance Contributions Act (FICA) requires employers and employees to contribute payroll taxes that fund Social Security and Medicare. These taxes are mandatory for most wage earners and represent an essential part of your payroll compliance responsibilities as an employer.

What FICA Covers

Forming the two core components of FICA, Social Security and Medicare taxes ensure financial support in retirement, protection for families, and access to healthcare later in life. This includes:

• Social Security Tax, which funds:
  • Retirement benefits: Monthly income to eligible retired individuals who’ve paid into the system during their working years
  • Survivors’ benefits: Financial support for qualified family members of deceased workers
  • Disability benefits: Income assistance for individuals unable to work due to a qualifying disability before retirement age
• Medicare Tax, which supports:
  • Hospital and medical coverage: Primarily for individuals age 65 and older. Note that Medicare doesn’t cover all healthcare costs.
  • Additional coverage: For younger individuals with certain disabilities, permanent kidney failure, or amyotrophic lateral sclerosis (ALS)

Understanding the purpose of these programs—and your role in funding them—is essential for maintaining compliance and protecting your business from costly risks.

FICA Wage Base Limits & Thresholds (as of 2025)

FICA liability is calculated using statutory tax rates and wage base limits, which set the maximum amount of wages subject to Social Security tax. Employers and employees share responsibility for these contributions, with Social Security subject to an annual wage cap and Medicare applying to all covered wages.

The chart below outlines the FICA rates as percentages of income and the limits on wages subject to FICA taxation as of 2025. It’s important to note that these figures are adjusted periodically and may change in future tax years.

FICA Employer Responsibilities

Employers play a key role in ensuring compliance with FICA. Your responsibilities extend beyond sharing the financial cost with employees—they also include important administrative and legal obligations. Specifically, employers are accountable for the following four responsibilities:

1. Withholding FICA Taxes: Employers must withhold the required Social Security and Medicare taxes accurately from each employee’s wages.
2. Reporting FICA Taxes: Employers are required to submit reports to the IRS using Form 941 or Form 944 for certain small businesses. These filings document the amounts withheld and the employer’s contributions.
3. Remitting FICA Taxes: Employers must deposit both the employee’s withheld taxes and their matching contributions with the IRS. The deposit frequency (monthly or semiweekly) depends on your business’s total payroll tax liability.
4. Ensuring Compliance With Evolving Regulations: FICA rules can shift frequently. Staying current on updated rates, thresholds, and reporting requirements is essential. Late deposits or miscalculations can result in penalties and increase your administrative burden.

Penalties for Noncompliance

Failing to comply with FICA tax regulations can lead to serious penalties. Common mistakes include late deposits, late filings, underpayment, and employee misclassification.

The IRS has broad authority to collect unpaid payroll taxes, including placing liens on business assets or executing levies on financial accounts. Penalties are often accompanied by interest charges, further increasing the financial burden. And while honest mistakes can result in fines and added costs, willful noncompliance can escalate to personal liability, civil fines, or even criminal prosecution.

FICA Takeaways for SMBs

Staying on top of FICA not only keeps your business in compliance, but it also ensures your employees continue to build toward future Social Security and Medicare benefits. Here are key points to keep in mind related to FICA:

1. FICA applies to most employees and covers all earned wages.
2. As an employer, you share responsibility for FICA funding for Social Security and standard Medicare taxes and must make contributions equal to those of your employees.
3. Accurate calculation of FICA taxes, timely deposits, and regular reporting are crucial to maintain compliance.
4. Misclassifying workers is a costly mistake that can result in penalties and back taxes.
5. Personal liability is possible for business owners and leaders in cases of willful noncompliance.
6. Partnering with an HR outsourcing provider with payroll and regulatory expertise can help you reduce risk and free up time to focus on growing your business.

Choosing a Payroll Partner to Simplify Compliance

Federal payroll taxes like FICA can add layers of complexity to your operations, especially when combined with other requirements such as FUTA and SUTA. That’s why many growing businesses choose to work with an HR outsourcing partner. A professional employer organization (PEO) like G&A Partners provides the expertise and guidance you need to reduce risk, simplify payroll management, and stay compliant with federal tax obligations.