Federal Insurance Contributions Act (FICA)

What Is the Federal Insurance Contributions Act (FICA)?

The Federal Insurance Contributions Act (FICA) is a U.S. law enacted in 1935 that mandates a payroll tax on the paychecks of employees, with matching contributions from employers. The money collected is used to fund the Social Security and Medicare programs.

From the beginning, the idea behind the act was that working people would contribute a certain amount of each of their paychecks throughout their working years to fund Social Security (and later Medicare) so that, later in life, they'd be able to count on earned financial and health benefits.

The Self-Employment Contributions Act (SECA) of 1954 requires the self employed to pay taxes on their net earnings to help fund Social Security and Medicare.

Key Takeaways

  • Individuals' FICA contributions pay current benefits and build future ones that will be owed to them.
  • FICA contributions are withheld from a wage earner's gross pay; the amount withheld depends on gross wages. 
  • Employers match the FICA taxes paid by their employees.
  • Wage earners cannot opt out of paying FICA taxes. 
  • Since the 1930s, FICA has funded Social Security programs that provide benefits to retirees, children and surviving spouses, and the disabled.

Understanding FICA

History

In 1935, the United States Congress passed the Federal Insurance Contributions Act, known as FICA. Its purpose was to collect contributions to fund the new Social Security program established by the administration of President Franklin D. Roosevelt in the same year.

Roosevelt believed that the money collected from all working Americans through FICA would belong directly to them. He didn't want the financial benefits for their retirement, disability, or death to depend on federal revenue. He feared that politicians would take and use the money for their own purposes.

In 1965, the payroll tax to fund health care benefits was added when Medicare was signed into law by President Lyndon B. Johnson.

FICA contributions are mandatory. Although rates and limits can be set annually, they have remained stable since 2020.

Rates and Limits

According to the Internal Revenue Service (IRS), FICA taxes are made up of old-age, survivors, and disability insurance taxes (Social Security) plus the hospital insurance tax (Medicare). Each applies different rates.

There's a maximum wage base for Social Security taxes on earnings, above which no tax is levied. The wage base was set at $142,800 for 2021 and $147,000 for 2022.

There is no wage base limit for Medicare taxes.

For 2021 and 2022, the total Social Security tax rate of 12.4% is split between employee and employer. The employee pays 6.2% and the employer pays the other 6.2%.

The total Medicare tax rate of 2.9% is also split between employee and employer. The employee pays 1.45% and the employer pays 1.45%.

Employees pay an additional 0.9% Medicare tax on wages over a threshold amount. For 2021 and 2022, that amount is $200,000 for individuals ($250,000 for married couples filing jointly). So, depending on their wages, an employee's total Medicare tax could reach 2.35% (1.45% plus 0.9%). Employers are not required to match the additional Medicare tax.

The Self-Employed Contributions Act (SECA)

Under SECA, the self-employed pay both the employee and employer portions of the Social Security and Medicare taxes. For example, as a sole proprietor, you'd be responsible for paying 12.4% of your income toward Social Security and 2.9% toward Medicare.

Moreover, you'd pay the additional Medicare tax of 0.9% on self-employment income over the threshold amount.

Though they pay more than wage earners, self-employed individuals do get a tax break. They can deduct the amount that represents the employer's share (half) as a business expense.

FICA and SECA taxes do not fund Supplemental Security Income (SSI) benefits, even though that particular program is run by the Social Security Administration (SSA). SSI benefits come out of general tax revenues.

How to Calculate FICA

Example 1

An employee earning $50,000 will pay $3,825 in FICA contributions in 2022. That breaks down as $3,100 in Social Security tax, and $725 in Medicare tax. The wage earner's employer would pay the same amount.

How it's calculated:

Social Security tax = $50,000 x .062 (the employee rate of 6.2%) = $3,100

Medicare tax = $50,000 x .0145 (the employee rate of 1.45%) = $725

Total FICA = $3,825 ($3,100 + $725)

Example 2

An employee earning $250,000 and filing singly will pay $12,464 in FICA contributions in 2022. That breaks down as $9114 in Social Security tax, and $3,350 in Medicare tax. The wage earner's employer would pay slightly less because they aren't required to pay the additional Medicare tax of 0.9% on the $50,000 above the $200,000 threshold.

How it's calculated:

Social Security tax = $147,000 (wage base limit) x .062 (the employee rate of 6.2%) = $9,114

Medicare tax = $200,000 x .0145 (the employee rate of 1.45%) = $2,900

Additional Medicare tax = $50,000 x .009 (the total rate of 0.9%) = $450

Total Medicare taxes = $3,350 ($2,900 + $450)

Total FICA = $12,464 ($9,114 + $3,350)

Special Considerations

On March 27, 2020, former President Donald Trump signed a $2 trillion coronavirus emergency stimulus package into law. Under the CARES Act, employers (not employees) were allowed to defer their share of Social Security taxes owed for the year ending Dec. 31, 2020. Specifically, 50% of the deferred amount was due by Dec. 31, 2021. The other half is due by Dec. 31, 2022. The law applies to the self-employed, too.

Certain employers were also eligible to claim a payroll tax credit for employees whom they continued to pay but who were not working due to the pandemic.

Do I Have to Pay FICA?

Yes. The Federal Insurance Contributions Act, or FIFA, requires that wage earners contribute a portion of their earnings to fund the Social Security and Medicare programs. Ultimately, you'll be entitled to what's referred to as earned benefits. You paid for them and they're owed to you.

Is Social Security the Same as FICA?

No, but it's related to it. FICA is an acronym that stands for an act passed by the U.S. Congress back in 1935 at about the time Social Security was established. This Federal Insurance Contributions Act called for all working people in the U.S. to fund Social Security so that it could provide them with financial benefits later in life. The dollar amounts on your paycheck labeled as FICA are the payroll taxes we contribute to Social Security, and since 1965, Medicare.

What Is the FICA Tax Rate?

Wage earners pay 6.2% on income of $147,000 or less toward Social Security. Their employers also pay 6.2% on their behalf. So the total tax rate for Social Security is 12.4%. Any income above $147,000 is not taxed for Social Security purposes. The Medicare rate of 1.45% is paid by wage earners on income currently up to $200,000. For income above that, they pay an additional Medicare tax of 0.9%. Employers match the 1.45% rate but are not responsible for matching the 0.9% rate.

Article Sources
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  1. Social Security Administration. "What Are FICA and SECA Taxes?"

  2. National Committee to Preserve Social Security & Medicare. "History of the Federal Income Contribution Act."

  3. Internal Revenue Service. "Topic No. 751 Social Security and Medicare Withholding Rates."

  4. Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)."

  5. Social Security Administration. "Supplemental Security Income Home Page—2021 Edition."

  6. U.S. Congress. "H.R.748 - CARES Act."