FICA

What is FICA?

FICA is an acronym that stands for Federal Insurance Contributions Act. It is a federal payroll tax used to fund the Social Security and Medicare programs. FICA is directly taken from the gross pay of employees. Employers are also required to give their share of FICA taxes. Because it is government-mandated, employees and employers cannot refuse to pay FICA taxes. 

Why is FICA important?

FICA tax is important because it is used to fund the Social Security and Medicare programs. These provide benefits for the disabled, retirees, survivors, children, and spouses. 

How much FICA tax is taken out of an employee’s paycheck? 

The specific amount of FICA tax that is taken out or withheld from an employee’s paycheck depends on their gross wages. The rates are set annually but they do not necessarily change each year. For example, the rate for FICA tax for 2020 did not change. It is still the same for 2021. 

So, what percentage is taken out of an employee’s gross wages?

• For Social Security, it is 6.2% of gross wages. 
• For Medicare, it is 1.45% of gross wages. 

Employers also have their share of FICA tax. Each employer matches the percentages mentioned above for a total of 15.3%. 

Is there a limit to the FICA tax? 

Let’s remember that FICA tax is a collective term for two different things: Social Security tax and Medicare tax. Each year, the federal government dictates a limit on the amount of earnings that are subject to Social Security tax. 

Social Security tax is also known as the “Old-Age, Survivors, and Disability tax” (OASDI). It is withheld on the first $142,800 of wages. Employees are not required to pay additional Social Security tax on their earnings above this threshold.

Since Social Security is 6.2% taken from the employee’s paycheck, this means that the maximum Social Security tax that an employee can pay in 2021 is $8,853.60.

There is no wage limit to Medicare tax contribution. All employees need to pay Medicare tax no matter how much they earn. Aside from the 1.45% of gross wages, there is an additional 0.9% tax on wages above $200,000 for individuals and $250,000 for married couples who are filing jointly. 

How is FICA tax calculated? 

Here is an example of a computation:

Let’s say Jillian is earning $50,000. Here are the FICA contributions:

• Social Security is 6.2% of gross wages.

$50,000 × 0.062 = $3,100

• Medicare is 1.45% of gross wages.

$50,000 × 0.0145 = $725

• The total FICA Tax of Jillian is the sum of Social Security and Medicare tax.

$3,100 + $725 = $3,825

• Like Jillian, her employer will also contribute $3,825 of FICA tax.

What is the responsibility of employers in paying FICA tax? 

Generally, employers are responsible for withholding FICA tax accurately from the paychecks of their employees. They are also responsible for submitting FICA taxes on time. If an employer fails to withhold FICA and federal income taxes, this can lead to criminal and civil sanctions. Aside from properly withholding taxes, employers must also report income and employment taxes to the Internal Revenue Service (IRS) through Form 941.