Federal Insurance Contributions Act (FICA): What It Is, Who Pays

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.

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 the rate can be set annually, it has remained mostly stable since 1990. The limit changes each year based on the National Average Wage Index.

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 is set at $147,000 for 2022 and $160,200 for 2023.

There is no wage base limit for Medicare taxes.

For 2022 and 2023, 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 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.

How To Calculate FICA

Example 1

An employee earning $50,000 will pay $3,825 in FICA contributions in 2023. That breaks down to $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 $13,282.40 in FICA contributions in 2023. That breaks down to $9,932.40 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 = $160,200 (wage base limit) x .062 (the employee rate of 6.2%) = $9,932.40

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 = $13,282.40 ($9,932.40 + $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.