FICA Tax

FICA Tax (Federal Insurance Contributions Act Tax)

Like any other tax, FICA tax is imposed on US citizens and their employers. The tax serves two purposes: Social Security and Medicare. Each participant in a company’s payroll system has FICA taxes taken out of their pay; this is then matched by their employer.

Purpose of FICA Taxes

FICA taxes support American workers as it funds Medicare and Social Security. Social Security provides retirement benefits, survivor benefits and disability benefits and Medicare provides health coverage to citizens 65 and over. FICA taxes distributes taxpayer money proportionally so funds are used correctly. So, FICA taxes make sure all working individuals and businesses contribute equally to get benefits from said programs.

How is FICA Tax Calculated?

FICA tax is calculated based on the tax rate applied to an employee’s wages. It’s divided into two:

• Social Security Tax Rate

The Social Security tax rate is 6.2% of an employee’s gross wages up to the annual wage base limit which is adjusted every year. Employers match this rate, totaling 12.4% (6.2% employee + 6.2% employer).

• Medicare Tax Rate

Medicare tax rate is 1.45% of an employee’s wages with no income limit. Employers also match this contribution, bringing the total Medicare tax rate to 2.9%.

• Additional Medicare Tax

An Additional Medicare Tax of 0.9% applies to wages above $200,000 for single filers or $250,000 for married couples filing jointly.

FICA Tax Contributions for Employees and Self-Employed

• For an employee earning $50,000 a year, $3,100 would go to Social Security (6.2%) and $725 to Medicare (1.45%). The employer matches these amounts, totaling $6,200 for Social Security and $1,450 for Medicare.
• Self-employed pay both 15.3% for Social Security and 2.9% for Medicare.

Importance of FICA Tax

• Funds Social Security and Medicare

FICA taxes are allocated directly to Social Security and Medicare, so the programs have the funds to pay benefits to eligible individuals.

• Meet Tax Obligations

Proper allocation and calculation of Federal Insurance Contributions Act Tax taxes so businesses and individuals meet their federal tax requirements and avoid penalties and interest for incorrect filings.

• Accurate Reporting and Compliance

By allocating FICA taxes correctly, both businesses and employees can have accurate financial records and tax returns showing the true cost of employment and income.

• Avoid Tax Problems

Correct allocation of FICA taxes prevent tax problems like underreporting or overreporting tax liabilities which can lead to IRS audits, penalties and interest charges.