Loading the player...

What is '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 to fund the Social Security and Medicare programs. 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, people with disabilities, and beneficiaries of said workers. Social Security helps retired people, people with disabilities, and families of retired, disabled, or deceased workers.  Medicare is a federal health insurance program for people 65 years and older and others with specific conditions.

FICA by the Numbers

FICA contributions are mandatory, with rates revised annually. FICA stipulates a maximum wage base after which no contribution is necessary for Social Security. There is no wage base limit for Medicare. In other words, the amount of the FICA payment depends on the income of the employee. The higher the income, the higher the FICA payment. For 2018, the maximum wage base is $128,400.

The Social Security tax rate is 6.2%, and the Medicare tax rate is 1.45%.  The employer pays a tax equal to the amounts withheld from employee earnings. While there is no maximum to the Medicare contribution, there is an additional 2.35% tax (1.45% regular tax and an additional Medicare tax of  0.9%) on wages over $200,000 for individuals ($250,000 for married couples filing jointly), paid by employees.

Under SECA, self-employed people pay both the employee and employer portions of the tax. The amount that represents the employer's share (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 calculation 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 as it is not responsible for the additional 0.9% tax for amounts more than $200,000.

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

RELATED TERMS
  1. IRS Publication 517 - Social Security ...

    A document published by the Internal Revenue Service that details ...
  2. Medicare Wages

    An employee's earnings that are subject to a U.S. payroll tax ...
  3. Self Employed Contributions Act ...

    A form of taxes that self-employed business owners must pay based ...
  4. Payroll Tax

    Payroll tax is a tax that an employer withholds and pays on behalf ...
  5. Social Security Act

    A law enacted by President Franklin D. Roosevelt in 1935 to create ...
  6. Social Security Tax

    The tax levied on both employers and employees to fund the Social ...
Related Articles
  1. 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.
  2. Taxes

    Small Business Tax Obligations: Payroll Taxes

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

    When Do I Stop Paying Social Security Tax?

    Almost never, unless you belong to one of these special groups.
  4. Retirement

    Medicare Costs to Rise for Most in 2017

    Most senior citizens will see their Medicare expenses rise in 2017.
  5. 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.
  6. Insurance

    Should Retirees Worry About Medicare Under Trump?

    With the Affordable Care Act on the chopping block, there are rumbles that Medicare could be next.
  7. Insurance

    Medicare Enrollment Part 2: The Right Path for You

    Medicare and Medicare Advantage both have benefits and pitfalls. Here are some things to consider.
  8. Managing Wealth

    Planning for Healthcare

    Planning how to pay for healthcare during retirement is a must—and the earlier you do it, the better. Medicare often fall short, so here are your options.
  9. Insurance

    Medicare Changes for 2016

    Get ready to pay more: Seniors will be shelling out additional cash for drugs, and some will have to ante up 15% more for Part B.
  10. Retirement

    Who Pays Your Social Security Benefits?

    The short answer is, current earners. Taxes on current wages pay the Social Security benefits of retirees, the disabled, children and other beneficiaries.
RELATED FAQS
  1. 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 >>
  2. Are Cafeteria plans subject to FICA, ERISA or FUTA?

    Find out whether cafeteria plans are subject to ERISA, what they offer to employees and which benefits are subject to FICA ... Read Answer >>
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including ...
  2. Bubble

    1. An economic cycle characterized by rapid expansion followed by a contraction. 2. A surge in equity prices, often more ...
  3. Swap

    A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, ...
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
Trading Center