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Overview of US Federal Insurance Contributions Act within OpenHRMS

As per the similar contribution from employers, a mandatory payroll tax applied on employee payslips according to the US law formulated in 1935 refers to Federal Insurance Contributions Act (FICA). The funding of social security and medicare taxes is used through the collected money from FICA. These programs benefit spouses, retirees, the disabled, children, and more. A unique HR software assists you in managing the Federal Insurance Contributions Act and other taxes within the US Payroll data inside an employee payslip. US Payroll management in your business for employees becomes simpler once imparting OpenHRMS software.

Let’s briefly discuss the Federal Insurance Contributions Act application on employee payslips.

OpenHRMS software helps to configure HR administration, attendances, appraisals, recruitment, reminder, tracking, and more. All essential steps for employee information in a company are made accessible through this software installation. Let’s analyze the FICA application on employee payslips provided by a firm using OpenHRMS. 

Brief about Federal Insurance Contributions Act

The Federal Insurance Contribution Act was passed by the United States in 1935. One of the main needs of FICA is to fund the nation's e medicare and social security programs. The rates are set in manually, and FICA contributions are vital. Taxes in Federal Insurance Contributions Act are formulated for disabled persons, hospital insurance, old age people, and more, as per the Internal Revenue Service (IRS). Each of these contains different taxes. Users can specify social security and medicare taxes separately as a salary rule once developing an employee payslip in the US. Now, let’s check out the role of Medicare and Social Security taxes in the US Payroll.

Medicare Tax 

A part of the medicare insurance program funded through a federal employment tax is a Medicare tax. It also refers to Hospital insurance tax and pay as a self-implementation tax. Everyone working in the United States must pay medicare taxes based on company regulations. It applied to a trust fund organized by the US treasury. The medicare tax rate of 2022 is 1.45% for individuals working in an organization. In contrast, self-employed individuals must pay 2.9% of the medicare tax. The medicare wage of a person is subject to a medicare tax. It includes bonuses, tips, taxable benefits, vacation allowances, commissions, etc.

Net Investment Income Tax and Additional Medicare Tax are the other two medicare surtaxes introduced by the Affordable Care Act in 2013. It is allowed for several types of income and high earners. A taxpayer can be subject to both these taxes quickly. The Additional Medicare Taxes apply to people with self-employment income, wages, and other thresholds. For example, a married couple earning more than $250000 and a single earning more than $200000 are subject to an additional medicare tax. A tax rate of 0.9% is applied as an Additional Medicare Tax. An employee is responsible for paying the total amount to the organization.

An extra 3.8% tax is applied to net income, refers as Net Investment Income Tax. An exemption is visible in the employer-paid portion within Net Investment Income Tax compared to a medicare tax. Capital gains, dividends, taxable interest, rental, etc., are included in the net investment income. This tax is specified for individuals' net investment income. The medicare health sector in the United States is funded through Medicare Tax.

Social Security Tax

Tax specified on both employees and employers to fund US social security programs is a social security tax. It pays for the disability, retirement, and survival benefits Americans receive yearly. Social security taxes cover autonomous taxpayers and income earned by employees. This tax is collected to help people who get survivorship facilities. The social security tax rate will be 12.4% in 2022. An employee must pay half of this rate, like 6.2%, as the social security tax. Moreover, an income limit is applied to the tax percentage. Those with an income limit of up to $147000 need to pay social security tax in 2022. This limit will change to $160200 for 2023.

It is possible to take social security taxes from the earnings of self-employed people. A self-employed person considers an employee or employer as per the Internal Revenue Sevices and must pay a total tax of 12.4%. We can mention the social security taxes on net earning to wage limit. Furthermore, the self-employment tax combines with the medicare and social security taxes. It is rated as 15.3% in 2022 and applied to 92% of net earnings in a business. We can view some exemptions in the case of social security tax. It includes nonresident aliens, religious group members opposed to social security benefits, and students who work in the same school. The social security tax income limit for employees in 2023 will be $160200.

How to Calculate Federal Insurance Contributions Act in US Payroll?

Few exemptions exist in the FICA tax for college students earned from campus jobs, foreign government employees, and specific religious groups. Before applying FICA to your payroll, you must identify three things in your mind. Firstly, deductions in social security are a flat price for employers and employees. Similarly, medicare deductions are also flat amounts for both parties. Finally, FICA withholds an income cap of $147000. We can calculate the FICA tax contribution of an employee by multiplying medicare and social security taxes with their gross pay. Hence, it is easy to find out the federal insurance contributions of a worker in a US Company.

An HR management system is an excellent use for most businesses in the market. With the help of OpenHRMS, a business can manage the US payroll data and formulate employee payslips based on essential tax details. Choose the right HR software to enhance your business productivity, and OpenHRMS is the right solution.