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).

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What Is FICA?

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.