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. Self-Employment Tax

    Money that a small business owner must pay to the federal government ...
  5. Withholding Tax

    1. Income tax withheld from employees' wages and paid directly ...
  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. How can I get a 'pensionado' visa to retire in Costa Rica?

    The first and primary criteria necessary to obtain a pensionado visa in Costa Rica is that you must have a pension or pension-like ... Read Full Answer >>
  5. What financial ratios are most useful for an investor to evaluate the liquidity of ...

    An insurance company, like any other nonfinancial company, needs access to liquidity in case it needs to fulfill its debt ... Read Full Answer >>
  6. What is Substantial Gainful Activity (SGA) and why is it important?

    Substantial gainful activity (SGA) is what the Social Security Administration (SSA) measures to determine work, income and ... 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

    An Advisor's Guide to Prof. Liability Insurance

    A guide to what financial advisors need to know about professional liability insurance.
  8. Insurance

    India's Two-Child Policy

    As of 2014, 11 Indian states have passed laws to restrict Indian citizens from having no more than two children.
  9. Economics

    What Does Asymmetric Information Mean?

    Asymmetric information describes a situation where one party in a transaction knows more than the other.
  10. Fundamental Analysis

    How to Calculate a Combined Ratio

    Combined ratio is a formula used in the insurance industry to measure the performance of an insurance company.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center