Definition
The Federal Insurance Contributions Act (FICA) is a United States federal law that requires employers and employees to contribute a portion of their wages and salaries to fund the Social Security and Medicare programs. These contributions help provide benefits to retirees, disabled individuals, and children of deceased workers, as well as cover healthcare under Medicare for people over 65 and for certain younger people with disabilities.
Key Components of FICA:
- Social Security Tax: This part of FICA funds the Old-Age, Survivors, and Disability Insurance (OASDI) program. The tax rate for Social Security is currently 6.2% for the employee and 6.2% for the employer, on wages up to the annual wage limit.
- Medicare Tax: This part of FICA funds medical and health-related services for certain categories of individuals. The tax rate for Medicare is currently 1.45% each for the employee and the employer. There is no wage limit for the Medicare tax, though high earners may pay an additional 0.9%.
Examples
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Example 1: Employee FICA Contribution:
- An employee earns $50,000 annually.
- Social Security tax contribution: 6.2% of $50,000 = $3,100
- Medicare tax contribution: 1.45% of $50,000 = $725
- Total FICA contribution from employee: $3,825 annually.
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Example 2: Employer FICA Contribution:
- The same employer must also contribute an equal amount for FICA.
- Social Security tax contribution: 6.2% of $50,000 = $3,100
- Medicare tax contribution: 1.45% of $50,000 = $725
- Total FICA contribution from employer: $3,825 annually.
Frequently Asked Questions (FAQs)
1. What does FICA stand for?
FICA stands for the Federal Insurance Contributions Act, which mandates payroll taxes to fund Social Security and Medicare.
2. Are self-employed individuals subject to FICA?
Yes, self-employed individuals must pay the full FICA taxes themselves, referred to as the self-employment tax, which includes both the employer and employee portions.
3. How often are FICA taxes collected?
FICA taxes are typically collected from each paycheck throughout the year.
4. Is there an income limit for the Social Security tax?
Yes, there is an annual income limit on the amount of earnings subject to the Social Security tax. For 2023, the limit is $160,200.
5. Does the Medicare tax have an income limit?
No, the Medicare tax does not have an income limit. However, an additional 0.9% Medicare tax is imposed on high earners.
Related Terms
- Social Security: A federal program that provides financial assistance to retired, disabled individuals, and survivors of deceased workers.
- Medicare: A federal health insurance program primarily for individuals over 65, but also for younger individuals with disabilities.
- Payroll Tax: Taxes imposed on employers and employees, usually calculated as a percentage of the salaries that employers pay their staff.
Online References
- Internal Revenue Service (IRS) - Understanding Employment Taxes
- Social Security Administration - FICA
- Medicare.gov - What Medicare Covers
Suggested Books for Further Studies
- “Federal Taxation: Basic Principles” by Dr. James W. Pratt and Dr. William N. Kulsrud
- “Social Security and Medicare: A Policy Primer” by Sheila Burke and Eric Kingson
- “Payroll Accounting 2023” by Bernard J. Bieg and Judith A. Toland
Fundamentals of FICA: Taxation Basics Quiz
Thank you for exploring the comprehensive details of the Federal Insurance Contributions Act (FICA) and attempting our quiz questions to enhance your understanding of this essential aspect of U.S. taxation. Keep learning and expanding your knowledge on taxation and other key business topics!
