What are FICA and FUTA? Both stand for federal laws that fund key government programs. FICA, or the “Federal Insurance Contributions Act” funds Social Security and Medicare. FUTA, or the “Federal Unemployment Tax Act,” funds (you guessed it) unemployment benefits.
All employers must calculate FICA and FUTA taxes and withholdings correctly to avoid serious tax penalties, and the formula isn’t always simple. We’ll break down the 2019 requirements and tax rates.
Federal Insurance Contributions Act (FICA)
The Federal Insurance Contributions Act (FICA) imposes a tax on both employees and employers to fund Social Security and Medicare. Employers are required both to withhold social security taxes from their employees and to pay a matching amount. FICA taxes are withheld from the majority of paychecks.
If you are an employer, you have two main responsibilities under FICA:
- Withhold the correct amounts of social security and Medicare taxes for your employees and send them to the government.
- Pay your matching share as the employer.
For social security, this amount is 6.2% withheld from the employees’ wages, up to a wage cap of $128,400 per employee, as well as your matching amount. For Medicare, the amount is 1.45% withheld from your employees’ wages, as well as your matching amount.
Federal Unemployment Tax Act (FUTA)
The Federal Unemployment Tax (FUTA) imposes a tax on employers that goes toward funding state workforce agencies and programs. These programs include unemployment insurance, as well as 50% of unemployment benefits.
FUTA rates are more complicated and less static than those for FICA. As of January 2019, the FUTA tax rate is 6.0% on the first $7,000 of gross earnings by a worker in a given year. This rate can be reduced by up to 5.4% through contributions to state unemployment programs (SUTA/SUI), which means the current minimum FUTA rate is 0.6%. However, the credit varies based on individual state regulations and other factors.