What Is the FICA Tax?
When you receive your paycheck, the amount you take home is less than what you actually earn — sometimes, much less than you expect. By law, your employer is required to withhold money from your earnings for taxes, including FICA taxes.
Paid in addition to your state and federal (and sometimes local) income taxes, FICA taxes fund your contributions to Medicare and Social Security. By paying into the system now, you’ll collect benefits from the government when you retire, or if you become permanently and totally disabled.
Although the money isn’t deposited into a personal account for your use, contributing funds allows you to earn credits that determine your Social Security payment amounts in the future. Your contributions also make you eligible to enroll in Medicare. These taxes are mandatory for everyone, even self-employed individuals, who pay via a program known as SECA, or the Self-Employed Contributions Act.
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What Does FICA Stand For?
FICA stands for Federal Insurance Contributions Act. In 1935, Congress passed the Social Security Act, a New Deal program designed to rectify many of the problems that were worsened by the Great Depression.
Prior to the Depression, many Americans had no source of retirement income if they had not saved money in advance. Many of these people also had no means to pay for their medical care after retirement. In addition, there was no federally-mandated program in place to provide disability income insurance for people who had experienced a disabling injury or were unable to work at all because of a disability.
To help ensure the wellbeing of older and disabled Americans, as well as the children of deceased workers, the 1935 Social Security Act created the Social Security program to provide a source of income to those who qualify, and introduced the Federal Insurance Contribution Act as a means to fund it. Initially, FICA was only intended to fund Social Security, but it was expanded to cover Medicare when that program was introduced in 1960.
For American workers, this means that a percentage of their earnings is withheld from every paycheck and submitted directly to the government on their behalf by their employers. The burden is split between the employer and the employee, so that each pays a total of 7.65% of the individual’s total income every year.
If you’re self-employed, you aren’t off the hook. Under SECA, you’re responsible for paying the entire FICA requirement (a total of 15.3% of income), but you may deduct half of that amount as a business expense.
What Is FICA Withholding?
At the end of every pay period, your employer deducts FICA taxes from your gross pay to submit to the IRS on your behalf. The exact amount of the deduction depends on the tax rate for the year and how much you earn, and your employer is required to match your contributions. You only pay FICA taxes on your earnings from work; you’re not taxed on earnings from such sources as rental income, interest, or dividends.
FICA taxes are mandatory, no matter how much you earn. Even if you elect not to have federal taxes withheld from your pay or don’t file taxes (which is only possible if you received a full refund of your federal income taxes in the previous year and expect the same in the current year), your employer will deduct FICA taxes.
That said, there are some limited exemptions from FICA taxes. Some student workers, employees of state and federal agencies with alternative retirement options, Native American workers, and family employees are exempt from FICA, as well as other specific groups.
In rare cases, you may overpay FICA taxes. It’s impossible to overpay the Medicare portion of FICA, because there is no limit on the wages that can be taxed. You must pay Medicare taxes on anything you earn. Because there is a wage ceiling on Social Security taxes, though, it may be possible to pay more than necessary.
This may happen because your employer continues to withhold Social Security taxes even after you hit the wage threshold, or because you change jobs during the year and exceed the threshold with all of the combined earnings. If this happens, you can report the overpayment on your 1040 when you file your tax return, and receive a refund for any overpayments.
So how much exactly do you pay for FICA taxes?
The first portion of FICA is for Medicare, which provides health coverage for seniors over age 65, people with disabilities, and those with certain qualifying health conditions. The FICA medicare tax is 2.9%; employees pay 1.45%, and employers pay the remaining half.
All of your earnings are taxed for Medicare, regardless of how much you earn. If you earn more than $200,000 in a year and are a single filer, you are also charged an additional 0.9% Medicare tax on the earnings above $200,000, which is not matched by your employer. If you file jointly, the threshold increases to $250,000.
In other words, if you earn $250,000 and file single, you pay 1.45% on the first $200,000 of income, and 2.35 percent on the remaining $50,000, but your employer will only pay 1.45% on that first $200,000. If you file jointly, and earn $250,000 combined, the Medicare tax remains 1.45% for all of your income.
The second part of FICA is Social Security, also known as OASDI (Old Age, Survivors, and Disability Insurance). Your contributions to Social Security, while you are working, allow you to earn credits toward Social Security payments after you retire.
Social Security payments are 12.4% of your income; you pay 6.2 percent and your employer pays 6.2 percent. You only pay Social Security for the first $137,700 you earn; your earnings above that amount are not subject to FICA Social Security withholdings.
How Is FICA Calculated?
When you start a new job, you are required to fill out a W4 form to help your employer determine how much tax to withhold from your paycheck each week. Based on your marital status and number of dependents, you can claim a certain number of withholding allowances. The more allowances you claim, the less income tax your employer will withhold.
However, your W4 doesn’t have any impact on your FICA withholding, because the required percentage is the same for everyone, regardless of family size. In other words, even if you claim zero allowances and pay more in income tax every week, your FICA contribution will be the same percentage as a co-worker who claims four allowances.
Your FICA taxes are calculated based on your gross income. They will appear on your pay stub as FICA, often broken down into the specific Medicare and Social Security categories.
Examples of FICA Calculations
To give you a better idea of how FICA can affect your take-home pay, consider these scenarios.
- John earns $35,000 per year. His total FICA contribution for the year is $5,355 — $2,677.50 of which is his responsibility. Over the course of the year, he pays about $388.35 for Medicare, and $2,289 for Social Security. Assuming he receives 26 paychecks per year, his FICA withholdings are about $103 per pay period.
- Mary earns $100,000 per year. Her portion of FICA is $7,650 (half of $15,300). She will pay $1,450 in Medicare tax, and $6,200 in Social Security taxes, or about $294.25 of each paycheck.
- Finally, Steve and Sally are a married couple earning $300,000 combined. Because they exceed the $250,000 limit for Medicare contributions, they must pay an additional 0.9% on $50,000 of their earnings. Therefore, they will contribute a total of $5,225 for Medicare ($4,050 for the first $250,000, $1,175 for the income over $250,000). Their Social Security contribution is charged at the same 6.2% rate as everyone else’s because there is no income ceiling for that portion. This puts their Social Security contributions at $18,600, for a grand total of $23,825 in FICA taxes for the year.
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This post was updated January 14, 2020. It was originally published January 14, 2020.