FICA TAXES: What It Is, Rate and How to Calculate It

what is fica taxes
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FICA is short for Federal Insurance Contributions Act. It specifies how taxes should be deducted from paychecks to fund the Social Security and Medicare programs. Here’s all you need to know about FICA taxes, how they work, who benefits from them, and how to calculate and pay the tax rates. 

What is FICA Taxes?

FICA, which stands for Federal Insurance Contributions Act, is a federal legislation that mandates businesses to withhold and pay a percentage of an employee’s salary to help support Social Security and Medicare. The total bill is split in half between the employer and the employee.

The FICA tax was established by statute in 1935. The cash will be utilized to provide working Americans with retirement savings and insurance schemes. “FICA taxes are the primary source of revenue for Social Security benefits,” says Ben Dobler, a certified financial planner and the founder of Cincinnati-based Stewardship Financial Counsel. FICA taxes, in addition to Social Security, fund the Medicare program.

The FICA tax is intended to help retirees who are eligible for benefits. “You gain credits for Social Security benefits when you work and earn and then pay your FICA taxes,” explains Michael Hammelburger, CEO of Bottom Line Group in Baltimore. In order to qualify for a Social Security credit in 2022, you must earn at least $1,510 and pay FICA taxes on that amount. You can earn up to four credits each year. You will be able to receive Social Security retirement benefits at the age of 62 if you have earned at least 40 credits.

Paying FICA taxes entitles you to disability and life insurance benefits as well. If you become disabled, you may be eligible for Social Security disability benefits if you meet specific conditions and have the required number of Social Security credits. If you die, your qualified family members, such as minor children and a surviving spouse who cares for small children or is 60 or older, may be eligible for Social Security survivor payments

What Is The FICA Tax Rate?

Only the first $147,000 of your earnings are subject to Social Security taxation in 2022. This will increase to $160,200 in 2023.

For people earning more than $200,000 (single filers) or $250,000 (married filing jointly), there is an additional 0.9% surtax on top of the usual 1.45% Medicare tax (joint filers).

Your employer is also obligated to pay half of your entire FICA liability.

FICA taxes are paid at the same rate by both employees and employers. FICA taxes are split into two categories: Social Security and Medicare. For 2022, the Social Security tax rate is 6.2% of wages, while the Medicare tax rate is 1.45% of wages. Together, these amount to a FICA tax rate of 7.65%. If you work for yourself, you must pay both the employee’s and the employer’s share of FICA taxes, which is 15.3% of your profits.

Limits on FICA Taxes

In 2022, the Social Security pay base is set at $147,000. This implies you’ll pay a 6.2% Social Security tax on wages up to $147,000. Your earnings above that threshold will not be taxed for Social Security.

Because the Medicare tax has no earnings ceiling, you must pay the 1.45% tax on all of your earnings. You must pay an additional Medicare tax if you file your taxes as a single individual and earn more than $200,000 per year. This tax is determined at 0.9% of your earnings exceeding $200,000 per year. If you are married and file jointly, the additional tax will be levied on earnings in excess of $250,000.

While most workers pay the FICA tax, it does not apply to all paychecks. Payments not liable to FICA taxes include:

  • Children under the age of 18 who are employed by their parents 
  • Qualified retirement plans contributions by employers
  • Service performed by students employed by a school, college or university.
  • Some church and qualified church-controlled organization wages.
  • Some state and local government salaries.

In some areas, state and local government employees who are eligible for a pension may only be required to pay the Medicare part of FICA taxes. If you are a religious employee, your employer may choose to exclude you from the FICA tax. Employees who are FICA exempt “will not have to pay Social Security or Medicare tax, but you will not obtain the benefits of the FICA system,” according to Dobler.

What Are The Two Types Of FICA Taxes?

FICA taxes are comprised of Social Security Taxes and Medicare Tax.

How To Calculate FICA Taxes

FICA taxes, which comprise 15.3% of your wages, are a mix of Social Security and Medicare taxes. You are responsible for half of the total bill (7.65%), which includes a Social Security tax of 6.2% and a Medicare tax of 1.45% on your earnings.

You’ll see these deductions on your paycheck because FICA taxes are a sort of payroll tax that your employer is required to collect from your salary. The Social Security element of FICA is sometimes known as the “OSADI” tax, which stands for “old-age, survivors, and disability insurance” tax.

The hospital insurance component is frequently referred to as a Medicare tax.

There are various sorts of taxes that are withheld from your paycheck. When you start new employment, you’ll usually be required to fill out a W-4 form. “Your Form W-4 determines the amount withheld from your check,” says Adriene Raynott, a senior business analyst at Cogneesol in New York City. The form collects information such as your marital status and a number of dependents, which impacts the amount withheld for taxes. If you want to make adjustments, download the W-4 form from the IRS website and resubmit it to your company’s payroll department.

You may calculate how much FICA taxes you’ll have to pay by multiplying your wage by 7.65%, taking into account any exclusions or limits that may apply to your circumstances. “If you make $50,000, you will pay $3,825 in FICA contributions,” Raynott explains. This can be calculated by multiplying the 7.65% rate by $50,000.

Examples On How To Calculate FICA Taxes

Example 1 

In 2023, an employee earning $50,000 will pay $3,825 in FICA contributions. This equates to $3,100 in Social Security taxes and $725 in Medicare taxes. The wage earner’s employer would pay the same sum.

It is calculated as follows:

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

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

FICA total = $3,825 ($3,100 + $725).

Example 2

In 2023, an employee earning $250,000 and filing alone will pay $13,282.40 in FICA contributions. This equates to $9,932.40 in Social Security and $3,350 in Medicare taxes. The wage earner’s employer would pay somewhat less because they are not required to pay the additional Medicare tax of 0.9% on any amount over $200,000 in earnings.

It is calculated as follows:

Social Security tax = $160,200 (wage base limit) x.062 (6.2 percent employee rate) = $9,932.40

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

$50,000 x.009 (total rate of 0.9%) Equals $450 more Medicare tax

Medicare taxes total $3,350 ($2,900 + $450).

FICA total: $13,282.40 ($9,932.40 + $3,350).

Does Everyone Pay FICA Taxes?

FICA taxes are paid by almost everyone, including resident aliens and many nonresident aliens. It makes no difference whether you work part-time or full-time. There are, however, certain exceptions. 

College students, for example, are exempt from paying FICA taxes on wages earned from on-campus jobs. Some nonresident immigrants, such as foreign government personnel and instructors, are also exempt. Certain religious groups (such as the Amish) can request an exemption from FICA taxes by completing IRS Form 4029. However, by failing to pay these payroll taxes, individuals forfeit their claim to Medicare and Social Security benefits.

Overpayment of FICA Taxes

Some workers pay more Social Security taxes than they should. This may occur if you change occupations more than once and all of your earnings are taxed, even if your total income exceeds the Social Security wage base limit. Fortunately, when you file your taxes, you may be eligible for a return.

If you work more than one job, you can claim your Social Security overpayment on Form 1040. If you owe taxes, the IRS will deduct a portion of your refund to pay them. Then you’ll get whatever’s left over. If you overpaid your Social Security taxes and only have one employee, you must request a reimbursement from your employer. Because there is no wage base limit, excess Medicare tax repayments are nonrefundable.

If you work more than one job, you may be underpaying FICA taxes. If this occurs, you will be required to make separate estimated tax payments (unless you asked for additional withholding on your W-4 form).

Why Should I Pay FICA Tax?

Employers are required to withhold taxes, including FICA taxes, from employee paychecks since taxes in the United States are a pay-as-you-go scheme. When you make money, the IRS wants to take its cut as soon as possible.

Some people are classified as “exempt workers,” which means they have chosen not to have federal income tax taken from their paychecks. However, Social Security and Medicare taxes will continue to be deducted from their paychecks.

In most cases, you are only immune from withholding if two conditions are met:

  • Because you had no tax liability last year, you received a refund of all federal income tax withheld.
  • You anticipate the same thing happening this year.

What Happens If You Don’t Pay FICA?

Employers who fail to appropriately record and pay FICA taxes may face civil and criminal fines. Late deposits can result in penalties ranging from 2% to 15% of the tax payable, depending on how many days past due the payment is received.

Do You Get FICA Tax Back?

In most cases, an employer requests a FICA tax refund on Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. For each refund period, the employer must file a separate Form 941-X.

Is Social Security and FICA the same thing?

No, although it is linked. FICA is an abbreviation that stands for a law passed by the United States Congress about the time Social Security was formed in 1935. This Federal Insurance Contributions Act required all working people in the United States to contribute to Social Security in order for it to provide them with financial benefits later in life. The FICA numbers on your paycheck represent payroll taxes paid to Social Security and, since 1965, Medicare.

Is FICA Tax the Same As Federal Income Tax?

FICA is not deductible from federal income taxes. While each of these taxes starts with the employee’s gross salary, they are two separate components that are calculated separately.

In Conclusion

FICA taxes, like federal income taxes, are mandatory – and in most situations, you can’t avoid them. However, because they pay for Medicare and Social Security, you will receive some of the money back when you retire, at least indirectly. 

While FICA tax rates are deducted automatically from your paycheck, you must pay particular attention if you change jobs or have more than one. You want to make certain that you are not paying more than is required. You’ll also need to use the IRS spreadsheets if you’re self-employed to guarantee you’re paying the necessary amounts.

  1. Payroll Report: Detailed Guide to Payroll Report
  2. What Tax Does Every American Have to Pay?
  3. Medical Savings Account (MSA): Best Retirement Options
  4. OASDI TAX: Old Age, Survivors, and Disability Insurance Contribution, Deferral & Payroll (Updated!)
  5. SOCIAL SECURITY TAX LIMIT: What is the Social Security tax limit for 2022?

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