What Is the Federal Insurance Contributions Act (FICA)?
The Federal Insurance Contributions Act (FICA) is a U.S. law that mandates a payroll tax on the paychecks of employees, as well as contributions from employers, to fund the Social Security and Medicare programs. For self-employed persons, there is an equivalent law called the Self-Employed Contributions Act (SECA).
- FICA is taken directly from an employee's gross pay.
- Employers and employees both pay FICA taxes.
- You cannot opt out of paying FICA taxes.
- FICA funds Social Security programs that include survivors, children and spouses, retirement, and disability benefits.
- The amount of FICA tax withheld from your paycheck depends on your gross wages.
What Is FICA?
FICA contributions are mandatory, with rates set annually—although not necessarily changed annually. They remained stable between 2020 and 2021, for example. The amount of the FICA payment depends on the income of the employee: the higher the income, the higher the FICA payment.
However, for Social Security contributions, there's a maximum wage base, after which no contributions are levied on additional income. The federal government withholds Social Security taxes up to the annual wage base, which is $137,700 in 2020 and $142,800 in 2021.
The Social Security tax rate is 6.2%, and the Medicare tax rate is 1.45% for 2020 and 2021. The employer pays a tax equal to the amounts withheld from employee earnings.
On March 27, President Trump signed a $2 trillion coronavirus emergency stimulus package into law. Under the CARES Act, employers (not employees) can defer their share of Social Security taxes through Dec. 31, 2020—50% of the deferred amount will be due Dec. 31, 2021 and the other half by Dec. 31, 2022. The law applies to the self-employed too. Certain employers will also be eligible to claim a payroll tax credit for employees whom they continue to pay but who are not working due to the crisis.
While there is no maximum to the Medicare contribution, there is an additional 0.9% tax on wages over $200,000 for individuals ($250,000 for married couples filing jointly) paid by employees. In total, the Additional Medicare Tax is 2.35% (1.45% plus 0.9%). Employers are not required to match the additional Medicare levy.
Under SECA, self-employed people pay both the employee and employer portions of the SECA-related tax. The amount that represents the employer's share (half) is a deductible business expense. Taxes from FICA and SECA do not fund Supplemental Security Income (SSI) benefits, even though that particular program is run by the SSA. Supplemental Security Income benefits come out of general tax revenues.
Example of FICA Calculations
Someone earning $50,000 will pay $3,825 of FICA contributions in 2021, broken down as $3,100 of Social Security tax, and $725 of Medicare. The person's employer would pay the same amount. There is no wage cap for Medicare.
A single person earning $250,000, on the other hand, will pay $12,929. The calculation of this second example is slightly more complex. The person will pay 6.2% of the first $142,800 earned for Social Security ($8,854), then 1.45% of the first $200,000 earned for Medicare ($2,900) and finally 2.35% of the $50,000 in income above $200,000 for Medicare ($1,175). In this last case, the employer would pay only $12,479, as it is not responsible for the additional 0.9% tax for an income of more than $200,000.
You can, of course, calculate contributions with a calculator, or turn to online tools, such as this, to do the work for you.