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A Complete Guide To FICA Taxes

The IRS collects FICA taxes to fund the federal government’s Medicare and Social Security programs. Here’s what you need to know about these paycheck deductions.

RELATED: Taxes Taken Out Of Paycheck: Everything You Need To Know | Internal Revenue Service

In this article:

  1. What Are FICA Taxes?
  2. Who Benefits from FICA Taxes?
  3. Who Needs to Pay FICA Taxes?
  4. How Are FICA Taxes Calculated?
  5. Are There Exemptions for FICA Taxes?
  6. Does Inaccurate FICA Tax Payment Happen?

Frequently Asked Questions About FICA Taxes

What does FICA mean? Federal Insurance Contributions Act

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What Are FICA Taxes?

Payroll taxes come in different forms. These include income taxes, unemployment taxes, and FICA taxes. Under FICA taxes, you have Social Security and Medicare taxes.

Social Security and Medicare taxes serve as the main financial source of the country’s social safety net. They resulted from 1935’s Federal Insurance Contributions Act.

FICA, in turn, was the result of the enactment of the Social Security Act, signed by then-President Franklin D. Roosevelt. The Social Security Act was the government’s response to the Depression-era collapse of the US economy.

Poverty became widespread during the Depression. The elderly sector, physically incapable of further labor, was the most affected.

President Franklin D. Roosevelt’s government fittingly assumed the responsibility of taking care of its citizenry’s most vulnerable sectors. Hence, the passage of the Social Security Act.

From FICA’s year of enactment to 1990, a single tax category covered both contributions to Social Security and Medicare. From 1991 onwards, the FICA tax was separated into its existing two categories.

FICA tax rates consistently changed in the years covered by the 50’s all the way to the 80’s. From 1991 onwards, these tax rates had remained consistent.

However, it’s important to note that while FICA tax rates have not changed in almost three decades, their corresponding gross income thresholds have increased on a yearly basis throughout the tax category’s existence.

Who Benefits from FICA Taxes?

Social Security and Medicare are two crucial portions of the country’s social safety net. These programs continue to exist thanks to FICA taxes.

In 2015, FICA taxes funded 88% of Medicare’s Hospital Insurance Trust Fund. In the same year, 85% of income disbursed to Social Security beneficiaries also came from FICA taxes.

To further understand where FICA funds go, let’s further discuss the benefits afforded to Social Security and Medicare recipients.

As for Social Security, the current monthly average income disbursed to retirees is $1,461. The maximum retirement benefit is $2,861.

Aside from retirement benefits, Social Security also covers income disbursements for people living with disabilities, widows and widowers of eligible Social Security beneficiaries, as well as children who lost working parents.

Meanwhile, Medicare funds go to three categories of recipients. They include the elderly (65 and older), people with End-Stage Renal Disease (ESRD), and younger people living with disabilities.

Specific services funded by Medicare fall under three categories. They are as follows:

  1. Hospital insurance – inpatient hospital expenses, hospice care, skilled nursing facility care, etc.
  2. Medical insurance – outpatient care, doctor’s sevices, medical supplies, etc.
  3. Prescription drug coverage

Who Needs to Pay FICA Taxes?

businessman counting money | A Complete Guide To FICA Taxes | fica tax | fica payroll tax
A person counts money on a table while using a calculator and drinking a cup of coffee

Both employees and employers need to pay FICA taxes. Basically, employees and their respective employers equally split the 15.3% FICA tax rate.

Here, 15.3% corresponds to the following:

  • Social Security tax (6.2% x 2)
  • Medicare tax (1.45% x 2)

Self-employed individuals pay similar taxes, although at much higher rates (12.4% Social Security tax and 2.9% Medicare tax). This is in accordance with the Self-Employment Contributions Act (SECA).

Since self-employed individuals have no employers to split with, they assume payment for the entire 15.3% FICA tax rate. However, they are eligible for specific tax deductions.

RELATED: Types Of Taxes We Pay In The US [Infographic, 2019 Updated]

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How Are FICA Taxes Calculated?

In the past decades, FICA tax rates have stayed fixed at 6.2% for Social Security and 1.45% for Medicare. That’s 15.3% for combined employee and employer contributions.

However, the amount of taxes you need to pay still depends on how much you earn and the existing gross income threshold specified by the IRS.

The latest update (2019) in terms of gross income threshold is $132,900. That is the maximum taxable income for Social Security.

What this means is anything exceeding that amount is exempt from Social Security tax. For instance, a person earning $140,000 will have $7,100 free of Social Security tax.

To compute, $132,900 will yield a Social Security tax of $16,479.6. Split between employee and employer, the resulting amount is $8239.8.

Meanwhile, Medicare tax does not recognize any income threshold for tax exemption. Instead, it imposes an income threshold by which an earner will have to pay additional taxes (0.9%).

This means that the higher you earn, the more Medicare tax you need to pay. The most recent income thresholds imposed by the IRS are as follows:

  • $250,000 (joint-filing married couples)
  •  $125,000 (half of a separate-filing married couple)
  • $200,000 (single filers)

If you are a single filer earning $250,000, your first $200,000 will be taxed at the basic rate of 1.45%. On top of that amount, your additional/remaining $50,000 income will be taxed with another 1.45% plus an additional 0.9%, totaling to 2.35%.

To compute:

  • 200,000 x 1.45% = $2.900
  • 50,000 x 2.35% = $1,175
  • Total Medicare tax = $4,075

Are There Exemptions for FICA Taxes?

Almost all members of the US workforce pay FICA taxes. These include both resident and nonresident aliens.

Whether you work full-time or part-time, you have to contribute to both Social Security and Medicare funds. However, there are a few exceptions.

College students working on-campus jobs are exempt. The same goes for nonresident aliens under specific sectors, such as teachers and foreign government employees.

Members of religious groups, such as the Amish people, can also apply for FICA exemption. Requests may be done via accomplishing the IRS Form 4029.

It is important to note that foregoing to participate in FICA contributions disallows a person from receiving benefits from social welfare programs funded by FICA taxes.

Does Inaccurate FICA Tax Payment Happen?

Yes, it does. It’s possible to either overpay or underpay FICA taxes.

Overpayment usually happens when a person changes jobs several times within a fiscal year. All of their earnings might be taxed for Social Security despite their total earnings exceeding the current ceiling taxable income.

IRS Form 1040 must be accomplished for claims of Social Security overpayment. Taxpayers with existing back taxes will only receive any surplus amount from their claimed refund after back taxes deduction.

If you have not transferred jobs but still overpaid Social Security tax, your employer becomes responsible for providing you with a refund. Meanwhile, for underpayment, make sure to explain the matter clearly via a W-4 Form.

FICA taxes serve as a lifeline for the country’s most vulnerable citizens, including indigents and the elderly. Although these paycheck deductions prove burdensome at times, they are essential to ensuring a robust social welfare system that safeguards everyone.

Do you have FICA-related questions not addressed in this article? Do not hesitate to ask in the comments section below.

If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.

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