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What Is FICA Tax (Explained: All You Need To Know)

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What is FICA tax?

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Let me explain to you what FICA tax is and why it’s important!

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What Is FICA Tax

FICA tax refers to the Federal Insurance Contribution Act (FICA) tax requires employers to withhold taxes from their employees’ paychecks.

The FICA tax allows the US government to fund Social Security and Medicare programs.

The Federal Insurance Contribution Act was enacted in 1935 requiring that employers deduct taxes from their employees’ wages and remit them to the government.

The main objective of the FICA tax is to have workers contribute to the Social Security and Medicare programs throughout their working lives so that they have the possibility of receiving benefits from these programs later on in their lives.

The government will use the FICA tax contributions to pay benefits to people who are entitled to receive them and allow the government creates the necessary reserve to pay future benefits.

When employers deduct the FICA tax from an employee’s paycheck, they are required to match the amount paid by their employees.

This means that the FICA tax is partially assumed by the employees and partially by employers.

Keep reading as I will provide more important information on FICA taxes.

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What Does FICA Tax Include

Employers and employees pay FICA taxes to help fund different programs offered by Medicare and Social Security in the United States.

The Federal Insurance Contributions Act (FICA) is composed of old-age, survivors, and disability insurance taxes (known as Social Security taxes).

It also includes the hospital insurance tax known as the Medicare taxes.

As of the writing of this post, the Social Security tax rate for employees and employers is 6.2% each (giving a total of 12.4% of the employee’s wages).

The Medicare tax rate is 1.45% for employers and employees giving a total of 2.9% of the employee’s total wages.

The combination of the Social Security tax and Medicare Tax amounts to 15.3% of the employee’s wages.

It’s important to note that an additional 0.9% of Medicare taxes apply to individuals earning more than $200,000 in a year.

Also, the Social Security tax is subject to a wage limit.

In other words, employees will pay Social Security taxes up to a maximum wage of $147,000.

Wages exceeding $147,000 will not be subject to Social Security Tax.

On the other hand, Medicare taxes apply to all wages (all wages are subject to Medicare Taxes).

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How To Calculate FICA Tax

Employees are required to pay a total FICA tax of 15.3% of their wages.

You can calculate your FICA tax obligation using the following formula:

FICA Tax = Gross Wages X 15.3%
Author

In other words, if a person earns $100,000 per year, the FICA tax will amount to $15,300 in total.

Out of the $15,300 taxes paid, $12,400 goes to fund Social Security and $2,900 funds Medicare.

Since employers are required to match the employee’s FICA tax, the total amount the employee will pay is $7,650 and the employer will pay $7,650.

So here is the breakdown of FICA taxes on a $100,000 salary:

  • Total FICA tax of 15.3% = $15,300
  • This includes Social Security tax of 12.4% = $12,400
  • It also includes Medicare tax of 2.9% = $2,900
  • Employee’s share of Social Security tax = $6,200
  • Employer’s share of Social Security tax = $6,200
  • Employee’s share of Medicare tax = $1,450
  • Employer’s share of Medicare tax = $1,450

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FICA Tax vs SECA Tax

FICA tax refers to the taxes that employers withhold from their employees’ paychecks.

This is a mandatory requirement imposed on employers by the Federal Insurance Contributions Act adopted in 1935.

On the other hand, SECA tax refers to the Self-Employment Contributions (SECA) Act which is a law that was adopted in 1954 requiring that self-employed individuals pay taxes on their earnings to fund Social Security and Medicare programs as well.

In essence, whether you are an employee working for a company or self-employed, you are required to pay a portion of your earnings to fund Social Security and Medicare programs.

A key difference between FICA taxes and SECA taxes is that FICA tax is partially paid by the employer and the employee.

On the other hand, SECA taxes are fully paid by the self-employed person.

This means that a sole proprietor or self-employed person will need to assume a total Social Security tax of 12.4% and 2.9% Medicare taxes.

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FICA Tax FAQ

Do I have to pay FICA tax?

Yes, every employee in the United States is required to pay FICA taxes to fund Social Security and Medicare programs.

The Federal Insurance Contribution Act requires that wage earner pay FICA taxes throughout their lives so that they can eventually take advantage of Social Security and Medicare benefits.

How much do I have to pay in FICA taxes?

You are required to pay a total of 15.3% of your wages in FICA tax.

A person earning $50,000 per year will have to pay $7,650 in total FICA taxes.

However, employees will need to pay half of their FICA tax obligations as the other half is assumed by their employer.

What is included in FICA taxes?

FICA tax includes Social Security tax and Medicare tax.

Half of Social Security taxes are assumed by employees and the other half by their employer.

The Social Security tax is charged on wages up to $147,000 per year whereas Medicare is charged on all wages.

Is FICA tax the same as income tax?

FICA tax is not the same thing as income tax.

FICA tax is composed of two elements: Social Security Tax and Medicare Tax.

Every employee is required to pay FICA taxes to fund the Social Security and Medicare programs offered by the government.

On the other hand, income tax refers to the amount of money you need to pay in taxes to the government based on your overall income and tax situation.

Depending on how much you earn, your income tax rate may change and your total income tax liability can vary.

What is FICA on my paycheck?

FICA on your paycheck indicates the amount of taxes you paid further to the Federal Insurance Contribution Act.

The FICA Act requires that employers deduct the FICA taxes from their employees’ wages.

Both employers and employees are required to pay a total of 15.3% of the employee’s wages in FICA tax.

This amount is equally split between the employer and employee each assuming a total of 7.65%.

Takeaways 

So there you have it folks!

What does “FICA Tax” mean?

In a nutshell, FICA tax represents taxes that employees and employers are required to pay to the government representing a total of 15.3% of the employee’s total wages.

The FICA tax includes Social Security tax of 12.4% and Medicare tax of 2.9%.

Employers and employees are each required to pay half of the Social Security tax and Medicare tax representing 6.2% for the former and 1.45% for the latter.

The idea is that working employees contribute to Social Security and Medicare throughout their working lives allowing them to take advantage of the benefits offered by the government later on in their lives.

The contributions are used by the government to pay benefits to those who are eligible and allow the government to pay future benefits.

Now that you know what FICA tax is and how it works, good luck with your research!

SECA Tax
Medicare Tax
Federal tax
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FUTA tax
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Editorial Staffhttps://lawyer.zone
Hello Nation! I'm a lawyer and passionate about law. I've practiced law in a boutique law firm, worked in a multi-national organization and as in-house counsel. I've been around the block! On this blog, I provide you with golden nuggets of information about lawyers, attorneys, the law and legal theories. Enjoy!

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