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?

  1. Medicare Wages

    An employee's earnings that are subject to a U.S. payroll tax ...
  2. Disability Insurance

    A program managed by the Social Security Administration that ...
  3. Social Security Tax

    The tax levied on both employers and employees to fund the Social ...
  4. Disability Insurance Trust Fund

    An account within the Social Security Trust Fund used to pay ...
  5. Medicare Part B Premiums

    A monthly fee that Medicare participants pay for medical insurance ...
  6. Social Security

    Social Security is a part of a social insurance and welfare program ...
Related Articles
  1. 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?
  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. 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.
  4. Managing Wealth

    Is Medicare Available to Anyone Besides Retirees ?

    People think you need to be 65 before you're eligible for Medicare. But you might be eligible before then. Here's who can be covered – and when.
  5. Retirement

    Medicare Open Enrollment Ends Dec. 7

    Avoid these 4 mistakes during the Medicare Open Enrollment period (Oct. 15 to Dec. 7).
  6. Retirement

    Top 5 Costliest Health Issues Retirees Face

    The healthcare system today is murky, with plans changing what they cover. What are the costliest out-of-pocket or underestimated healthcare expenses that retirees need to watch out for?
  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. Financial Advisor

    Breaking Down Medicare Open Enrollment for Clients

    For financial advisors, open enrollment is an important opportunity to be of service to clients, especially when it comes to reviewing Medicare options.
  9. Insurance

    5 Mistakes People Make When Enrolling in Medicare

    Medicare is complicated and knowing how and when to sign up can be challenging. Don't make these five Medicare enrollment mistakes.
  10. Insurance

    Medicare: Understanding the Basics

    Understanding the basics of Medicare can help you plan for the benefits you should expect to receive.
  1. 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 Answer >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center