Federal Insurance Contributions Act - FICA

AAA

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.

INVESTOPEDIA EXPLAINS '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? 

RELATED TERMS
  1. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  2. Federal Unemployment Tax Act - ...

    The original legislation that allows the federal government to ...
  3. Medicare

    A U.S. federal health program that subsidizes people who meet ...
  4. Medicare Part D

    A prescription drug benefit program that was created through ...
  5. Self-Employment Tax

    Money that a small business owner must pay to the federal government ...
  6. Payroll Tax

    Tax an employer withholds and/or pays on behalf of their employees ...
RELATED FAQS
  1. How are Social Security benefits affected by your income?

    Social Security retirement benefits may be affected by a variety of factors, but your earned income is one of the most important. ... Read Full Answer >>
  2. How do I report Simple IRA contributions on a W2?

    Savings Incentive Match Plans for Employees, or SIMPLE IRAs, are designed for small businesses as a way to offer a retirement ... Read Full Answer >>
  3. Are the deferred earnings in a SIMPLE IRA subject to FICA taxes?

    While salary deferral contributions to a savings incentive match plan for employees of small employers (SIMPLE) IRAs and ... Read Full Answer >>
  4. Why are insurance companies and pension funds considered financial instruments?

    Insurance policies are widely considered to be financial instruments. Pension funds may contain many different types of financial ... Read Full Answer >>
  5. What is the difference between moral hazard and adverse selection?

    Adverse selection occurs when there's a lack of symmetric information prior to a deal between a buyer and a seller, whereas ... Read Full Answer >>
  6. What is the theory of asymmetric information in economics?

    The theory of asymmetric information was developed in the 1970s and 1980s as a plausible explanation for common phenomena ... Read Full Answer >>
Related Articles
  1. Taxes

    Small Business Tax Obligations: Payroll Taxes

    Don't leave it up to your accountant - owners are ultimately responsible for fulfilling tax obligations.
  2. Retirement

    Introduction To Social Security

    You've probably contributed to this fund, but will you reap the benefits? Find out here.
  3. Options & Futures

    Getting Through The Medicare Part D Maze

    Having trouble sorting through your prescription drug coverage options? We offer some solutions to the confusing process of selecting the right Medicare Part D coverage for you.
  4. Insurance

    What Does Medicare Cover?

    Don't assume you're insured. Find out what you can expect from this healthcare program.
  5. Retirement

    Keep Working Or Stay At Home With The Kids?

    Choosing to stay at home with the kids is a choice that has both positive and negative financial consequences.
  6. Entrepreneurship

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  7. Professionals

    How to Fund Retirement with Insurance

    So you've contributed the max to all available retirement vehicles...now what? Consider a permanent life insurance policy (and its fee structure).
  8. Taxes

    Are Taxes the Solution for Income Inequality?

    Income inequality continues to increase. Why? And are taxes the solution?
  9. Economics

    What is Adverse Selection?

    Adverse selection occurs when one party in a transaction has more information than the other, especially in insurance and finance-related activities.
  10. Retirement

    Some Tax Considerations For Your Retirement Income

    Even if you don’t plan to retire, it’s still a good idea to think ahead about where to live, your income and how it all interacts with Social Security.

You May Also Like

Hot Definitions
  1. Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment ...
  2. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  3. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  4. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  5. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  6. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
Trading Center