It causes us heartache when employers deduct a bulk from our paychecks in the name of taxes. It surely does! But knowing what is this money used for, what are the major tax components, and how it benefits us can definitely ease that pain a little bit. Studies suggest it is very important for us to know the tax breakups and monitor our withholding taxes because we may be paying more tax than we’re actually required to! This article is all about understanding one of the main payroll taxes – FICA tax, which is single-handedly responsible for a fat pay cut.
In this article we will discuss:
- What is FICA Tax?
- FICA Tax Breakdown
- Tax Table
- How to Calculate FICA Tax
- Other Taxes Commonly Confused with FICA Tax
- Additional Resources
What is FICA Tax?
FICA stands for ‘Federal Insurance Contributions Act’. It is a U.S. law that mandates a payroll tax on the paychecks of employees and equal contributions from the employers to fund Social Security and Medicare programs for older Americans. FICA tax is the money that is deducted from an employee’s gross pay. It is equally compensated by the employers and is not optional. For self-employed citizens, there is a similar tax that applies, called SECA (Self-Employed Contributions Act).
FICA tax is a mandatory payroll deduction and a combination of two separate taxes, Social Security tax, and Medicare. Social Security tax funds retirement programs, survivors, spouses, and disability benefits. Its official name is OASDI (Old-age, survivors, and disability insurance). FICA tax deductions are also used to provide benefits to widows, widowers, children who have lost working parents, disabled workers. Paying social security tax while you are working guarantees social security benefits after retirement. Also, it guarantees a secure future to your family in case of any unfortunate event like death, disability, unemployment, etc with the covered employee.
Medicare tax is commonly known as the health insurance tax. It pays for health insurance of retired Americans, mainly people above 65 years, people with disabilities, or critical medical conditions.
FICA Tax Breakdown
FICA tax is the combined sum of 6.2% social security tax and 1.45% medicare tax that the IRS levies on employee paychecks. Overall, this tax is calculated as an employee-employer contribution, and the employers need to pay the same percentage that they withhold from the employees’ salaries.
Back in 2019, the amount subjected to the Social Security tax was the first $132,900 of your earnings; in 2020, it is been increased to $137,700. This means you do not have to pay Social Security tax in 2020 if your total income during this year is above $137,700. This amount is called the maximum wage base and all income above this limit is exempted from this tax. The maximum wage base increases every year to keep up with inflation.
To sum up, in 2020, employees are required to pay 6.2% of their wages up to the maximum wage base, and employers are required to pay the same 6.2% of their employee's wage earnings up to the maximum wage base, making a total of 12.4% Social Security tax. Likewise, a 2.9% medicare tax is also shared by both the parties. Typically, employers withhold FICA tax from their employees’ paychecks and send it to the IRS on their behalf.
An additional 0.9% Medicare tax may apply to your income if your earnings exceed $200,000 if you’re a single filer and $250,000 if you’re jointly filing with your spouse. However, employers need not match the additional Medicare taxes.
As for self-employed individuals, they are their employers and their employees. Self-employed individuals pay both halves of the Social Security tax and Medicare tax. This makes it 12.4% (6.2% x 2) social security tax and 2.9% (1.45% x 2) medicare tax, which is equivalent to 15.3% on their net earnings. Self-employed citizens need to report the same on Schedule SE with their income tax returns. The only good news here is the self-employed individuals can deduct the employer equivalent portion of their Self-employment tax while calculating AGI (Adjusted Gross Income). That portion of the earnings is exempted from income tax. Schedule SE shows the amount one can claim back.
For a clearer understanding of FICA tax, take a quick look at the tax table below. It charts out the percentage contribution of the employee and the employer.
|Tax||Employee Share||Employer Share|
|Social Security tax ( OASDI)
|6.2% (only the first $137,700 of earnings in 2020)||6.2% (only the first $137,700 of earnings in 2020)|
|Additional Medicare||0.9% (for income above $200,000 if you’re a single filer, for income above $250,000 if you’re jointly filing)||NIL|
How to Calculate FICA Tax
While calculating FICA tax, one thing you got to remember is the filing status of the individual. Rest assured, everything is calculated as – 6.2% on the first $137,700 or 6.2% on your total income if your income is less than $137,700 plus, 1.45% of 200,000 or 1.45% of your total income if that’s less than $200,00 plus, 2.35% of extra income above $200,000 (if you're a single individual) or $250,000 (if you’re filing jointly), depending on your filing status.
Examples of calculating FICA tax
- Case 1
Let's suppose you earn $60,000. Then, what will be your total FICA contribution?
Social security tax = 6.2% of 60,000 = $3720
Medicare tax = 1.45% of 60,000 = $870
Total FICA contribution = $4590
Your employer will withhold this amount ($4590) and also need to contribute the same amount, as a part of the employer equivalent portion in the FICA tax. Remember there is no max wage cap for Medicare.
- Case 2
Suppose a single person is earning $220,000. How much will be his FICA contribution?
The person will pay 6.2% of the first $137,700 earned towards Social Security = $8,537.4
1.45% of the first $200,000 earned towards Medicare tax = $2,900
Finally, 1.45% + 0.9% (additional Medicare) = 2.35% of the $20,000 above $200,000 for Medicare ($470)
Total FICA contribution = $11,907.4
In this case, the employer contribution will be $11,907.4 minus $470 (extra medicare), which is $11,437.4
- Case 3
Suppose you’re filing jointly and your combined income is $260,000. How much is the FICA contribution?
You will pay 6.2% of the first $137,700 earned towards Social Security = $8,537.4
1.45% of the first $200,000 earned towards Medicare tax = $2,900
Finally, 1.45% + 0.9% (additional Medicare) = 2.35% of the $10,000 above $250,000 for Medicare ($235)
You total FICA contribution = $11,672.4
Your employer’s share will be $11,437.4
The tax code is a little complex. We don't deny that! But, you can always resort to easier ways like using an online FICA tax calculator. E-file.com, FreeTaxUSA and H&R Block can help you plan, prepare, and file your tax returns without any hassle. It doesn’t matter if you aren’t good with math or don’t understand the tax laws, still you can get the maximum benefits, and refunds with these services.
Note: The U.S. tax system runs on a pay-as-you-earn arrangement. As soon as you start earning money, the IRS wants its cut from your salary. This is very simple, by paying the FICA tax rather, its components – Social Security and Medicare, while you are employed, you secure Social Security credits for your future social security benefits. Some employees are called ‘exempt workers’, it means they have opted not to have federal income tax withheld from their pay. But this exemption doesn't affect their Social Security and Medicare tax deductions, employers continue to withhold FICA tax from their paychecks. We repeat – by any means, FICA tax doesn't stand optional.
Other Taxes Commonly Confused with FICA Tax
Withholding taxes generally refers to Social Security tax and Medicare tax. But there are a few other types of taxes that you might confuse with FICA tax, as they are also withheld from your paycheck.
- Federal income tax – Federal income taxes are applied on all forms of earnings – employment earnings, capital gains. It is the largest source of revenue for the government. The amount of Federal income tax to be deducted from your pay depends on what you fill in W-4. Employers deduct this amount from your salary and remit it to the IRS.
- State tax – This is an income tax deducted from your paycheck and sent to the state by your employer on your behalf. The amount of the State tax depends on where you work, where you live, and other information filled out by you in W-4. You will be happy to know some states still don’t have an income tax.
- Local income tax or wage tax – Your locality, city or county may also have an income tax. Money deducted from your pay goes to the welfare of the bus system, emergency services, etc.
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