Loading the player...

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?

RELATED TERMS
  1. Medicare Wages

    An employee's earnings that are subject to a U.S. payroll tax ...
  2. Social Security Act

    A law enacted by President Franklin D. Roosevelt in 1935 to create ...
  3. IRS Publication 517 - Social Security ...

    A document published by the Internal Revenue Service that details ...
  4. Self Employed Contributions Act ...

    A form of taxes that self-employed business owners must pay based ...
  5. State Health Insurance Assistance ...

    State Health Insurance Assistance Programs (SHIP) offer free ...
  6. Medicare Advantage

    Hospital and medical insurance provided by private companies ...
Related Articles
  1. Retirement

    Understanding Your FICA Payments

    The Federal Insurance Contributions Act is a U.S. law that requires a paycheck deduction be paid to Social Security and Medicare.
  2. Financial Advisor

    How Much Medicaid and Medicare Cost Americans

    Medicaid & Medicare cost Americans plenty out of their paychecks. But how much, really? And what does that money buy?
  3. Retirement

    6 Benefits You're Required by Law to Offer Your Employees

    Learn about the benefits that a business must offer to employees, such as family and medical leave, as well as various forms of insurance coverage.
  4. Insurance

    When Should You Delay Enrolling in Medicare?

    On the surface Medicare doesn't look that pricey, but there are situations in which your finances and health might be better served by delaying enrollment.
  5. Taxes

    Small Business Tax Obligations: Payroll Taxes

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

    When Am I Eligible For Medicare?

    You’re eligible for Medicare when you reach age 65 or meet other requirements.
  7. Managing Wealth

    Have Medicare? Which Employer Health Plan to Get

    Over 65 and still working? You're eligible to register for Medicare, but should you also opt for employer health insurance, if offered – and which plan?
  8. Insurance

    Should You Enroll in Medicare if You're Still Working?

    Whether or not you should enroll in Medicare while working depends on your particular situation.
  9. Retirement

    Medicare Costs to Rise for Most in 2017

    Most senior citizens will see their Medicare expenses rise in 2017.
  10. Managing Wealth

    It's Open Enrollment: Move to Medicare Advantage?

    Oct. 15 - Dec. 7 is the time (after joining) to switch from Medicare's flexibility to the often broader coverage or lower cost of Medicare Advantage.
RELATED FAQS
  1. How much of my income goes to Social Security taxes?

    Discover how much of your income goes to social security tax: what the rate is, what the limits are and what types of income ... Read Answer >>
  2. How is Social Security tax calculated?

    Find out how Social Security tax withholding is calculated, including the impact of the Medicare tax and the maximum taxable ... Read Answer >>
Hot Definitions
  1. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  2. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  3. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  4. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  5. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  6. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
Trading Center