Most employers and employees are familiar with the payroll taxes they pay to fund Social Security and Medicare. These two taxes were established under the Federal Insurance Contributions Act, a federal law that requires virtually everyone to fund two of the most prevalent public benefits programs maintained by the federal government. The FICA tax is a shared tax burden for employers and employees, and even self-employed individuals have FICA tax obligations under most circumstances on qq.
What is the FICA tax?
The Federal Insurance Contributions Act established tax rates required of both employers and employees to fund Social Security and Medicare. The small tax that comes out of each worker’s paycheck is a portion of the FICA tax, with employers also contributing funds per employee.
“The Federal Insurance Contributions Act, or ‘FICA,’ is a federal tax that both employers and employees pay via their payroll tax obligations,” James Maio, director of tax at Slate Law Group, told business.com “The FICA tax is made up of two separate taxes, the Social Security tax and the Medicare tax.”
The FICA tax pays into federal retirement and disability benefits established under Social Security, as well as health insurance for American citizens age 65 and older under Medicare. [Read related article: Employer’s Guide to Payroll Deductions]
How does the FICA tax work?
The FICA tax is based on a set rate that can change through legislative action. Currently, the total FICA tax finances Social Security through a 12.4% payroll tax on wages up to a taxable earnings cap of $137,700. That cap is set to increase to $142,800 on Jan. 1, 2021. Any earnings above the cap are not subject to the Social Security portion of the FICA tax.
Medicare is funded through a 2.9% payroll tax with no taxable earnings cap. This means the Medicare tax rate still applies even when earnings surpass the Social Security cap. However, Maio said there is an additional Medicare tax for employees who fall into the “highly compensated” category – those who earn $250,000 annually if married and filing jointly, those who earn $125,000 annually if married and filing separately, and those who earn $200,000 annually and file as single or head of household.
“The law requires employers to withhold the additional 0.9% of Medicare tax from the wages of employees earning [highly compensated salaries],” Maio said.
Otherwise, the total FICA tax costs are split evenly amongst employers and employees.