What is the Federal Insurance Contributions Act (FICA)?
The Federal Insurance Contributions Act (FICA) is an American law that imposes a tax on employee wages, as well as employer contributions, to fund social security and health insurance programs. For the self-employed there is an equivalent law called the Self-Employed Contributions Act (SECA).
What is FICA?
These contributions are mandatory, with rates set annually, but not necessarily amended annually; they remained stable between 2020 and 2019, for example. The amount of the FICA payment depends on the employee’s income: the higher the income, the higher the FICA payment. However, for social security contributions, there is a maximum salary base, after which no contribution is taken from additional income.
- The FICA is taken directly from an employee’s gross salary.
- Both employers and employees pay FICA taxes.
- You cannot refuse to pay FICA taxes.
- FICA funds social security programs that include survivors, children and spouses, retirement, and disability benefits.
- The amount of FICA tax deducted from your salary depends on your gross salary.
The social security tax rate is 6.2%, and the Medicare tax rate is 1.45%, as of 2019. The employer pays tax equal to the amounts deducted from employees’ earnings . While there is no maximum Medicare contribution, there is an additional 0.9% tax on wages over $ 200,000 for individuals ($ 250,000 for married couples filing jointly) paid by employees. In total, the additional Medicare tax is 2.35% (1.45% plus 0.9%). Employers are not required to match the additional Medicare levy.
For FICA taxes, the maximum amount of gross income (the social security ceiling) taxable in 2019 is $ 132,900, compared to $ 128,400 in 2020.
Under the Self-Employed Contributions Act (SECA), the self-employed pay both the employee and the employer the SECA tax. The amount that represents the employer’s share (half) is a deductible business expense. FICA and SECA taxes do not fund Supplemental Security Income (SSI) benefits, even though this particular program is managed by the SSA. Additional security income benefits come from general tax revenue.
Example of FICA calculations
Someone who earns $ 50,000 will pay $ 3,825 in FICA contributions in 2019, split into $ 3,100 in social security tax and $ 725 in health insurance. The person’s employer would pay the same amount. There is no salary cap for health insurance.
However, a single person earning $ 250,000 will pay $ 12,305. The calculation of this second example is slightly more complex. The person will pay 6.2% of the first $ 132,900 earned for social security ($ 8,230), then 1.45% of the first $ 200,000 earned for health insurance ($ 2,900) and finally 2.35 % of $ 50,000 in income over $ 200,000 for health insurance ($ 1,175). In the latter case, the employer would only pay $ 11,130 because he is not responsible for the additional 0.9% tax for income over $ 200,000.
You can, of course, calculate contributions with a calculator, or turn to online tools like this to get the job done for you.