Federal Insurance Contributions Act - FICA

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What is the 'Federal Insurance Contributions Act - FICA'

The Federal Insurance Contributions Act (FICA) is a U.S. law that creates a payroll tax requiring a deduction from the paychecks of employees as well as a contribution from employers. The withheld amounts go towards the funding of the Social Security program and Medicare. For self-employed persons, there is an equivalent law called the Self-Employed Contributions Act (SECA).

BREAKING DOWN 'Federal Insurance Contributions Act - FICA'

Social Security and Medicare are U.S. social programs that provide benefits for retirees, the disabled, and children of deceased workers. Social Security is aimed at helping retired people and those who are unemployed or disabled whereas Medicare is a federal health insurance program aimed mostly at people who are 65 or older.

FICA by the Numbers

FICA contributions are mandatory and the rates are revised annually. FICA stipulates that there is a maximum wage base after which no contribution is necessary for Social Security, while there is no maximum on what can go toward Medicare. In other words, the amount of the FICA payment depends on the income of the contributor; the higher the income, the higher the FICA payment. For 2016, the maximum wage base is $118,500.

The social security tax rate is 6.2% and the Medicare tax rate is 1.45%, for a total of 7.65%. This means the maximum social security tax for employees and employers in 2016 is $7,347, or 6.2% of $118,000. While there is no maximum to the Medicare contribution, there is an additional 0.9% tax on wages over $200,000. This additional tax is only paid by employees since employers are not responsible for it.

Under SECA, Self-employed people, must pay both the employee and employer portion of the tax, but half - which would represent the employer's half - is a deductible business expense.

Practical Examples of FICA Calculation

Someone earning $50,000 pays $3,825 of FICA contributions, broken down as $3,100 of Social Security tax and $725 of Medicare. The person's employer would pay the same amounts.

A person earning $250,000, on the other hand, pays $11,422. The computation of this second example is slightly more complex: the person pays 6.2% of the first $118,500 earned for Social Security ($7,347), then 1.45% of the first $200,000 earned for Medicare ($2,900) and finally 2.35% of the $50,000 above $200,000 for Medicare ($1,175). In this last case, the employer would pay only $10,972 because it is not liable for the additional 0.9% on income above $200,000.

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