The Federal Insurance Contributions Act or FICA) is a United States law that requires a payroll tax on employees’ paychecks, as well as contributions from employers, to fund the Social Security and Medicare programs.
In the case of self-employed workers, there is an equivalent law called the Self-Employed Contributions Act (SECA).
What is the FICA tax?
The FICA tax is created in compliance with the Federal Insurance Contributions Act. Commonly, it is also known as salary tax, payroll tax or withholding of origin.
But, what will your employer use that money that keeps you from month to month? In itself, the FICA tax is collected by the employer companies in order to pay for services inherent to the worker, such as their old age, disability or survivor insurance (OASDI) and Medicare.
These contributions are mandatory, with rates that are set annually but not necessarily changed annually (they were stable between 2018 and 2019, for example).
The amount of the FICA contribution depends on the employee’s income. The higher the income, the higher the FICA will be. However, in the case of Social Security contributions, there is a maximum salary base, after which no additional income tax is charged.
- FICA is taken directly from an employee’s gross wages.
- Both employers and employees 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 taxes withheld from your paycheck depends on your gross salary.
The Social Security tax rate is 6.2%, and the Medicare tax rate is 1.45%, as of 2019. Employer pays tax equal to amounts withheld from employee earnings .
While there is no maximum 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 tax.
For FICA taxes, the maximum amount of gross income (the social security cap) that can be taxed in 2019 is $132,900, up from $128,400 in 2018.
Under the Self-Employed Contributions Act (SECA), self-employed workers pay both the employee and the employer a portion of the SECA-related tax. The amount representing the employer share (half) is a deductible business expense. FICA and SECA taxes do not fund Supplemental Security Income (SSI) benefits, even though that particular program is administered by the Social Security Administration (SSA). Supplemental Security Income benefits come from general tax revenue.
Example of FICA calculations
Someone who earns $50,000 will pay $3,825 in FICA taxes in 2019, broken down into $3,100 in Social Security taxes and $725 in Medicare taxes. The person’s employer will pay the same amount. There is no wage limit for Medicare.
A single person earning $250,000, on the other hand, will pay $12,305. The calculation of this second example is a bit more complex. The individual will pay 6.2% of the first $132,900 earned for Social Security ($8,230), then 1.45% of the first $200,000 earned for Medicare ($2,900), and finally 2.35% of the $50,000 of income over $200,000 for Medicare ($1,175).
In the latter case, the employer would only pay $11,130, as they are not responsible for the additional 0.9% tax on income over $200,000.
Advantages and disadvantages of applying the FICA tax
Let’s recap. The FICA tax is designed to fund Social Security and Medicare. Although independent contractors are not subject to the payment of this tax – but rather a very similar one – the FICA tax is mandatory for all employees in the United States.
Nowadays, the total tax rate of the tax is 15.3% of gross salary of the worker: 7.65% corresponding to the employee and 7.65% corresponding to the employer. But, leaving this aside, what benefits does your application have?
Advantages of the FICA tax
- The payment of the tax is automatic and you will not have to worry about it. Unlike federal income taxes, for example, you will not have to declare and file the FICA tax; since your employer will automatically withhold your contribution from each of your paychecks.
- The money will go into an emergency fund that you may need in the future. Almost all Americans and residents of the country will need Social Security – at least once – in their life, whether due to a disability caused by an unexpected accident or simply due to reaching old age. What you are paying today will secure your future.
Disadvantages of the FICA tax
- No limits on taxable earnings. At least not when it comes to Medicare. After you go over a certain limit, you will have to pay an additional 0.9%.
- It is a mandatory tax (with few exceptions). Even if you don’t plan to use Social Security or Medicare services, you will have to pay FICA tax.
Differences between FICA tax and income tax
As you may already know, there are many types of taxes in the United States. This makes understanding each of them – and their main function – is especially difficult. Remember that even states have their own taxes that may or may not resemble neighboring states.
This leads us to ask, What is the difference between FICA tax and income tax? In summary, we could say that the main distinction is the subject of payment. All employees pay FICA tax, but not all pay income tax, do they?
Let’s look at some other differences:
|FICA tax versus federal or state income tax|
|FICA tax||Income tax|
|Funds two programs: Social Security and Medicare||Finances the federal or state budget, depending on the case|
|The Social Security contribution is capped, while the Medicare contribution is not capped but increases after a certain amount||Tax brackets not only change every year, they dictate how much each citizen has to pay (and whether or not they have to pay)|
|FICA tax is withheld by the employer on each paycheck||The responsibility to declare and pay the income tax falls on each taxpayer and, if they do not do it on time, they could receive a large fine.|