FICA stands for the Federal Insurance Contributions Act. This law outlines that taxes should be withheld from paychecks and used to fund the Social Security and Medicare programs. Both employees and employers are impacted by the FICA tax. Here’s a look at how the FICA tax is calculated.
What Is FICA?
The law that created the FICA tax was passed in 1935. The funds are used to provide a retirement savings and insurance program for working Americans. “FICA taxes are the primary funding source for Social Security benefits,” say Ben Dobler, a certified financial planner and founder of Stewardship Financial Counsel in Cincinnati, Ohio. In addition to Social Security, FICA taxes are funneled into the Medicare program.
The FICA tax is designed to provide support for retirees who qualify for benefits. “As you work and earn, and then pay your FICA taxes, you earn credits for Social Security benefits,” says Michael Hammelburger, CEO of Bottom Line Group in Baltimore, Maryland. To earn a Social Security credit in 2020, you’ll need to earn at least $1,410 and pay FICA taxes on that amount. Every year, you can receive up to four credits. Once you have earned at least 40 credits, you will be eligible to receive Social Security retirement benefits beginning at age 62.
Paying FICA taxes also qualifies you for disability and life insurance benefits. If you become disabled, you may be eligible for Social Security disability benefits if you meet certain criteria and satisfy the minimum number of Social Security credits for your age. If you die, Social Security survivor benefits may also be available for your eligible family members, such as minor children and a surviving spouse who cares for young children or is age 60 or older.
FICA Tax Rates
Both employees and employers pay FICA taxes at the same rate. FICA taxes are divided into two parts: Social Security tax and Medicare tax. The Social Security tax rate is 6.2% of wages for 2020, and the Medicare tax rate is 1.45% of wages. Together, these make up a tax rate of 7.65% for FICA taxes. If you’re self-employed, you’ll need to pay for both the employee’s and the employer’s portion of FICA taxes, which is 15.3% of earnings.
FICA Tax Limits
The Social Security wage base is set at $137,700 in 2020. This means that you’ll pay the Social Security tax on 6.2% on your earnings up to $137,000. Your wages above that limit will not be taxed for Social Security.
Medicare tax does not have an earnings limit, so you’ll be expected to pay the 1.45% tax on all your earnings. If you file taxes as a single person and earn more than $200,000 a year, you have to pay an additional Medicare tax. This tax is calculated at 0.9% of your wages above the $200,000 mark. If you are married and file jointly, that additional tax will apply to earnings above $250,000.
While the FICA tax is paid by most workers, the tax doesn’t apply to all paychecks. Payments that are not subject to FICA taxes include:
- Children under age 18 who are employed by their parents.
- Qualified retirement plan contributions from 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.
State and local government employees in some states who are entitled to a pension may only be required to pay the Medicare portion of FICA taxes. If you are a religious employee, your organization could choose to claim an exemption from the FICA tax. Employees who are exempt from FICA, “won’t have to pay Social Security or Medicare tax, but you won’t receive the benefits of the FICA system, either,” Dobler says.
How to Calculate Your FICA Tax
When you start a new job, you’ll typically fill out a W-4 form. “For FICA calculations, the amount your employer withholds from your check is dependent upon your form W-4,” says Adriene Raynott, a senior business analyst at Cogneesol in New York City. The form relates information such as your marital status and number of dependents, which ultimately determines the amount that will be taken out for taxes. “When more allowances are claimed, less tax is deducted,” Raynott says. If you want to make changes, you can download the W-4 from the IRS website and submit it again to your company’s payroll department.
You can calculate how much you’ll pay for FICA taxes by multiplying your salary by 7.65%, taking into account any exceptions or limits that might apply to your situation. For example, “If you earn $50,000, you will pay $3,825 as a FICA contribution,” Raynott says. This is found by multiplying the 7.65% rate by $50,000.
