What Is FICA?
The Federal Insurance Contributions Act (FICA) is a US payroll tax used to fund the Social Security and Medicare programs. These programs are designed to support those without wage income: retirees, dependents of non-working adults, and those with disabilities.
Who Does FICA Apply to?
FICA taxes are mandatory for most employers and employees. This applies to hourly (wage) workers, salaried workers, and the self-employed.
Is Anyone Exempt from FICA?
The only exemptions are for religious groups that were in existence prior to 1950. Such groups must file Form 4029, but the exemption is unavailable if the members also qualify for Social Security.
Additionally, foreign students or educators who hold other citizenship – but who are teaching in the United States – are exempt from paying FICA taxes.
Generally, non-US citizens who do not receive Social Security or Medicare benefits are exempt from paying FICA taxes. Review this comprehensive list of FICA exemptions before claiming exemption.
FICA for Employees and Employers
Your employer withholds 6.2% (up to $137,700) from your wages for Social Security tax and 1.45% for Medicare taxes. If earned income is more than $200,000 for a single filer ($250,000 for joint filers), employees must pay an additional 0.9% in Medicare tax. The amount that is withheld is automatically taken from your paycheck and paid directly to the Social Security Administration.
Employers match the amount paid in FICA taxes, so a total of 15.3% of your wages is contributed as a result of your employment. The employer’s contribution is also paid directly to the Social Security Administration.
FICA for the Self-Employed
Self-employed workers pay taxes towards Social Security and Medicare, too. However, these are referred to as “self-employment taxes” or the Self Employed Contributions Act (SECA). Self-employed people must pay an employee portion of 6.2% Social Security tax (up to $137,700 of net earnings).
Additionally, self-employed people must pay the employee portion of 2.9% Medicare tax on all net earnings. If earned income is more than $200,000 for a single filer ($250,000 for joint filers), self-employed people must pay an additional 0.9% in Medicare tax. In effect, employee contributions for both Social Security and Medicare are the same for employees and the self-employed.
Self-employed people also pay the employer’s contribution to FICA (15.3%), which equals the total rate that employers and employees pay. Since if you’re self-employed, you are both the employer and the employee, so you pay both the employer and the employee portion of the tax. Self-employed individuals must calculate their SECA taxes (FICA for self-employed people) using IRS Schedule SE.
How Do FICA Taxes Work?
FICA taxes are automatically withheld from the gross amount of an employee’s paycheck. These taxes are then matched by the employer and deposited to the Social Security administration (where they go toward current programs).
FICA does not work like a bank account. You aren’t “depositing” your social security payments to withdraw them at a future date. Rather, the payments made today into Social Security and Medicare go into one of two trust funds:
Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits
Disability Insurance (DI) Trust Fund, which pays disability benefits.
Both funds are financial accounts with the US Treasury and are invested in US Treasury bonds. Benefits are paid out of the funds, and any surpluses that the funds make are reinvested.
How Are FICA Benefits Calculated?
Every payment is linked to a social security number. The Social Security Administration tracks the lifetime earnings of each citizen based on that social security number. Each person receives one “credit” for every $1,410 per earnings per year, and up to four credits per year. The amount of money needed to earn a single credit increases annually.
Most people need, on average, 40 credits (or 10 years of employment) to qualify for Social Security benefits. Young people need fewer credits to qualify for disability payments.
You can visit the Social Security administration and set up online access to track your estimated benefits.
What’s Funded by FICA Taxes?
FICA taxes fund both the US Social Security Program and the Medicare Program. As previously described, Social Security taxes are kept in a trust fund in the US Treasury department.
At 62, qualifying citizens can receive Social Security payments. However, taking payments at age 62 means taking less money than if they waited until their full retirement age (which currently varies by age group but is at least 65). Payments can be delayed until age 72, after which additional credits and potentially higher Social Security retirement benefits will accrue.
Medicare is a government-sponsored healthcare program available to American citizens and permanent legal residents aged 65 and older. Permanent residents must have lived in the United States for five consecutive years or more in order to qualify for Medicare.
Medicare is divided into Parts A, B, C, and D:
Part A covers hospitalization
Part B covers medical care (e.g. doctor visits)
Part C is a private insurance plan that manages all Part A and B benefits and provides additional flexibility in choice of providers
Part D covers prescription medication
Even though Medicare recipients receive healthcare coverage through the plan, there may be some out-of-pocket expenses, especially for those electing Parts C and D coverage.
FICA Rate for 2020
The 2020 FICA employee tax rate is 7.65%. The Social Security portion is 6.20% on earnings, up to the taxable amount of $137,700. The Medicare portion is 1.45% on all earnings up to $200,000. Individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9% in Medicare taxes.
FICA taxes are part of what’s called “withholding.” Withholding includes the money that’s taken out of your paycheck to pay FICA taxes, plus federal and state income tax, and sent directly to the taxing governments. Some cities like New York also levy a local tax on residents.
Can I Deduct FICA on my Taxes?
No, the IRS does not allow you to deduct FICA from your income taxes.
Where Is FICA on my Paystub?
FICA may be listed on your paystub under “taxes” or “withholding.” The typical paystub breaks down each tax paid (e.g. federal, state, local, Social Security, Medicare) under the withholding amount.
On federal tax forms, self-employed people need to complete Schedule SE to determine their self-employment taxes. They can then deduct the employer portion from their gross income.