FICA
FICA stands for the Federal Insurance Contributions Act. It’s a U.S. federal payroll tax that is deducted directly from employees’ paychecks. FICA taxes fund two major social programs:
- Social Security: This provides benefits for retirees, disabled people, and the dependents of both. Social Security taxes also go towards people who have lost a parent or spouse.
- Medicare: This is a federal health insurance program primarily for people aged 65 or older, but it also covers some younger people with certain disabilities or medical conditions.
The total FICA tax rate is 15.3%, with 12.4% going to Social Security and 2.9% going to Medicare. This tax is typically split evenly between the employer and employee, each paying 7.65% of the employee’s wage (6.2% for Social Security and 1.45% for Medicare). However, self-employed individuals are responsible for the entire 15.3% because they are considered both the employer and the employee.
There are wage limits for the Social Security part of FICA, meaning only a certain amount of an employee’s income is subject to this portion of the tax each year. There is no wage limit for the Medicare portion of FICA. Some high-income individuals may also be subject to an additional Medicare tax.
Please note that these rates and limits can change, and it’s important to check the most recent guidelines from the IRS or a professional tax advisor.
Example of FICA
Imagine you are an employee at a company and you earn a salary of $50,000 per year.
The total FICA tax rate is 15.3%. However, as an employee, you are responsible for half of this amount (7.65%), and your employer pays the other half.
So, each year, you will pay 7.65% of your $50,000 salary in FICA taxes, which equals $3,825. This amount is divided between Social Security (6.2% of your salary, or $3,100) and Medicare (1.45% of your salary, or $725).
Your employer will pay an equal amount, so the total contribution to FICA (from both you and your employer) will be $7,650 for the year.
Again, please note that FICA tax rates and income limits are subject to change, so it’s important to check the most recent guidelines or consult with a professional tax advisor.
This example shows how FICA taxes are calculated and split between an employee and employer. Remember, if you’re self-employed, you’re responsible for the full 15.3% rate, because you are considered both the employer and the employee.
