Federal Insurance Contributions Act - FICA

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DEFINITION of 'Federal Insurance Contributions Act - FICA'

A U.S. law requiring a deduction from paychecks and income that goes toward the Social Security program and Medicare. Both employees and employers are responsible for sharing the FICA payments.

BREAKING DOWN 'Federal Insurance Contributions Act - FICA'

FICA stipulates that there is a maximum that can be allocated to Social Security, while there is no maximum on what can go toward Medicare. Once the maximum to Social Security is achieved, the contributor's FICA payment will not increase the Social Security portion but will continue to increase the contribution to Medicare. The amount of the FICA payment depends on the income of the contributor; the higher the income, the higher the FICA payment.

If FICA states, for example, that 12.4% of your salary goes toward Social Security and 2.9% goes toward Medicare, half of the payment is made by you and the other half by your employer. This means you pay 7.65% (6.2% and 1.45%) of your income, while your employer pays the other 7.65%. Self-employed people, on the other hand, must pay the full amount, but half - which would represent the employer's half - is a deductible business expense.

To learn more about FICA, read Why is there a cap on the Federal Insurance Contribution (FICA) tax? 

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