Federal Insurance Contributions Act (FICA)

You are probably required to pay Federal Insurance Contributions Act taxes (also called payroll or withholding tax) if you get a salary or wage. Your paycheck is automatically reduced to cover FICA taxes. The government receives the funds from your company as well as its match (an additional 7.65% of your pay). In this article, we will discuss what FICA taxes are, how they work and who is responsible for paying them.

What is the Federal Insurance Contributions Act ?

The Federal Insurance Contributions Act or FICA is a U.S. law enacted in 1935 that mandates a payroll tax on the paychecks of employees, with matching contributions from employers. The funds raised are utilized to pay for Social Security and Medicare. Half of the entire tax (7.65%) is paid by employees, and the other half is covered by employers.

The original intent of the act was for working individuals to pay a specific percentage of each paycheck they received during their working years into Social Security (and later Medicare) in order to be able to rely on earned financial and health benefits in their older years. 

Like federal income tax, FICA taxes are mandatory. However, because they support Medicare and Social Security, you will in a sense get the money back, at least indirectly, once you retire. Self-employed people must pay taxes on their net income under the Self-Employment Contributions Act (SECA) of 1954 in order to support Social Security and Medicare.

FICA taxes are routinely deducted from your paycheck, but if you move jobs or have multiple employment, you'll need to pay special attention. If you're self-employed, you'll need to utilize the IRS worksheets to make sure you're paying the correct amounts.

Key Facts of FICA Tax

  • The FICA is a United States law establishing payroll taxes to fund the Medicare and Social Security programs.
  • Social Security programs that pay payments to retirees, children and surviving spouses, and the disabled have been funded by FICA.
  • The FICA tax is mandatory for almost all American workers. There is no way for wage employees to avoid paying FICA taxes.
  • A wage earner's gross pay is deducted from to cover FICA contributions, the amount withheld depends on gross wages.
  • Employers match the Federal Insurance Contributions Act taxes paid by their employees. 
  • The current FICA tax rate is 15.3%, which is the total of 7.65% of income paid by employees and 7.65% paid by employer.
  • FICA contributions made by individuals fund current benefits and create ones that will be owed to them in the future.

How the FICA Tax Works ?

The Federal Insurance Contributions Act (FICA) is a U.S. federal payroll contribution directed towards both employers and employees to fund Medicare and Social Security. The hospital insurance tax, often known as Medicare taxes, and the old-age, survivors, and disability insurance, also known as social security taxes, are the two types of taxes covered by the Federal Insurance Contributions Act.

Under the Federal Insurance Contributions Act, most employees and employers are required to pay FICA taxes. You must also pay Social Security and Medicare taxes, if you own a business. FICA taxes have different rates. A percentage of the employee's subject wages is used to determine the taxes. Employers are required by FICA to deduct the appropriate amount from each employee's paycheck and send it to the government. The consequences of noncompliance might include severe penalties.

History of Federal Insurance Contributions Act

The Federal Insurance Contributions Act, was enacted by the US Congress in 1935. Its objective was to gather contributions for the new Social Security program launched by President Franklin D. Roosevelt's administration the same year.

Roosevelt believed that the funds obtained through the FICA from all working Americans belonged to them. He didn't want their retirement, disability, or death benefits to be reliant on federal funding. He was concerned that politicians would seize the funds and utilize them for their own gain. When President Lyndon B. Johnson signed Medicare into law in 1965, the payroll tax was imposed to pay for the health insurance benefits.

Contributions to FICA are required. The rate can be set annually, although since 1990, it has largely stayed constant. Depending on the National Average Wage Index, the cap is adjusted annually.

Who is Pays FICA Taxes ?

Almost everyone pays FICA taxes, including nonresident aliens and resident aliens. It doesn’t matter whether you work full-time or part-time.

Federal payroll tax obligations for an employer include withholding from an employee's compensation and making an employer contribution. Payroll tax withholding and payment duties are numerous for employers. FICA taxes are unusual in that both the employer's share of the taxes and the statutory withholding from an employee's earnings must be paid.

However, there are a few exceptions. For example, college students are not required to pay FICA taxes on the money they get from on-campus employment. Some non-resident immigrants, such as foreign government personnel and instructors, are also exempt from certain laws. By submitting IRS Form 4029, certain religious organizations can request an exemption from FICA taxes. However, individuals forfeit the right to receive Medicare and Social Security benefits by failing to pay these payroll taxes.

How Much is FICA Tax ?

The Internal Revenue Service (IRS) states that FICA taxes are made up of the hospital insurance tax (Medicare) plus the old-age, survivors, and disability insurance taxes (Social Security). Each applies different rates. 

Based on an employee's gross pay, the total FICA tax is 15.3%. The employer and employee each pay 7.65%. 2.9% of Medicare tax and 12.4% of Social Security tax. 

Although it is possible to calculate FICA by only multiplying the employee's gross income by the FICA tax rate, this method is a little more involved. This is due to the Social Security wage base, which is a yearly cap on the Social Security share of FICA. Social Security taxes on wages have a maximum wage base above which no tax is applied. For 2023, the wage base is set at $160,200. There is no wage base limit for Medicare taxes.

The FICA taxes are breakdown as follows :

  • Up to the annual maximum wages due to Social Security, 6.2% of FICA taxes go into Social Security.
  • The Medicare tax is 2.9%—1.45% for employers and employees on all employee earnings with no limit.
  • A 0.9% Additional Medicare tax is required to be deducted from higher-earning employees' pay when their annual income exceeds $200,000. Employers are exempt from paying this tax; employees are required to do so.

Payments that are not subject to FICA taxes :

All forms of pay are not subject to FICA. Listed below are a handful of the more typical employee payments that are exempt from FICA tax withholding :

  • Wages paid after the employee's death
  • A disabled worker's wages received after being qualified for Social Security disability benefits
  • Reimbursements for work-related expenses, such as normal mileage or per diems, at the applicable government rate
  • Underage (under 18) workers employed by parents
  • Employer contributions to an qualified pension or retirement plan
  • Workers compensation payments
  • Tips less then $20 in a month

How to Calculate FICA Tax ?

Employees' gross pay must be multiplied by the employee rate of 7.65% to  calculate the FICA withholding due. You must pay attention to two crucial factors when performing your calculations :

  • Because you are only allowed to deduct up to the maximum Social Security amount each year, you must make sure that no employee's annual gross pay total exceeds that amount.
  • Additionally, you must make sure that when higher-paid employees' annual wages hit $200,000, the additional Medicare tax is deducted from their paychecks.

If you continued to withhold Social Security tax above the allowed amount, you overpaid FICA taxes and must give the employee the money back. The employee will need to submit a claim to the IRS if you are unable to provide them their entire refund.

Example of FICA

In 2023, a worker making $50,000 will pay $3,825 to FICA. That amounts to $725 in Medicare tax and $3,100 in Social Security tax. The employer of the wage earner would give the same sum.

How it is calculated :
  • Medicare tax = $50,000 x .0145 (the employee rate of 1.45%) = $725
  • Social Security tax = $50,000 x .062 (the employee rate of 6.2%) = $3,100
  • Total FICA Tax = $3,825 ($3,100 + $725)

How to Pay FICA Tax ?

You must send FICA tax deposits along with amounts withheld from employee wages for federal income tax to the Internal Revenue Service (IRS) periodically. Depending on the average size of deposits over the previous year, you must make deposits of these sums either semi-weekly or monthly. You must use electronic fund transfers (Electronic Federal Tax Payments System) for all payroll tax deposits.

Where to Report FICA Taxes ?

On Form 941, employers are required to submit a quarterly payroll tax report to the IRS that details the FICA taxes that were deducted from employee wages during the quarter as well as the required employer contribution.

This report, which is due on the last day of the month after the end of each quarter, lists the sums taken out of employees' paychecks, the sums owed by employers, and the sums paid out during that period.

Note :
You won't have to worry about paying FICA because it is a nonelective tax that is automatically deducted from your paycheck all year long.

Who is Exempt from FICA Taxes ?

Nonimmigrant students, teachers, scholars, researchers, and trainees (including medical interns) who are temporarily present in the US on F-1, J-1, M-1, or Q-1 visas are exempt from paying Social Security and Medicare taxes as long as they continue to be nonresidents for federal income tax purposes.

As long as they are nonresident foreign taxpayers, non-immigrants with F-1, J-1, M-1, or Q-1 visas may request refunds for the portion of these taxes deducted from their pay. They must abide by their visas "substantially." More than five years cannot have passed since they last visited the country physically. Once an alien becomes a resident, they are required to start paying Social Security and Medicare taxes.

A-visa holders who work for foreign governments are likewise immune from FICA withholding, as are D-visa holders who are crew members of ships or aircraft. In these circumstances, the ships and aircraft must be foreign vessels owned by foreign employers. Additionally exempt are workers for international organizations. They frequently possess G visas. Nonresidents who are in the country on an H-visa are also exempt from FICA taxes. These are frequently contract farm laborers. A foreign student's participation in "practical training" or other off-campus job authorized by U.S. Citizenship and Immigration Services is exempt from the rule.

Who can get a refund for FICA overpayment ?

If you pay more in FICA taxes than you should, you are entitled to a return of the extra money. You might overpay if :

  • These taxes were deducted from your pay even though you are not subject to pay them.
  • You paid estimated tax payments even though you didn't owe FICA taxes.
  • Your estimated payments were calculated inaccurately.
  • Although both employers withheld FICA taxes, your combined income from two employers is over the wage base.

How to Claim a FICA Tax Refund ?

If you have overpaid taxes for any reason, you can submit a request to get the money returned. Prior to requesting a Social Security or Medicare tax refund from your employer, you must first make that attempt. If your employer is unable to give you a full refund, you can file a Form 843 refund claim with the IRS.

Attach a copy of your Form W-2 for the relevant tax year to support the amount of withholding that was made from your pay. The amount of Social Security and Medicare taxes withheld is indicated in boxes 4 and 6 on the W-2.

If you are a nonresident foreign worker who is on a visa, including a copy of the page from your passport that bears your visa stamp. Add INS Form I-94 as well as any other supporting papers proving your right to work in the US. INS Form I-538 and IRS Form 8316 may also be required.

Send your documentation to the IRS location where Form 941 is filed by your employer. If you are eligible, you should be compensated. You won't be able to collect a refund for a tax year that was more than three years ago since there is a three-year statute of limitations on filing for tax refunds.

Frequently Asked Questions

What is the purpose of FICA?
The Social Security and Medicare programs, which offer benefits to seniors, the disabled, and children, are funded in part by Federal Insurance Contributions Act.

Does everybody pay FICA tax?
You are probably subject to the FICA tax if you work as an employee in the US. The majority of workers must contribute to the system, while there are a few exceptions, including for some religious personalities or groups and for some students employed by the institution they attend.

What income is subject to FICA?
To all taxable compensation is applied the FICA tax rate. Salary, tips, wages, commissions, bonuses, and taxable fringe benefits are all included in this.

Can I stop paying FICA?
The Federal Insurance Contribution Act (FICA) payroll taxes, which support the Social Security and Medicare systems, are not exempt from payment. FICA taxes will be deducted from your wages as long as you hold a job that is subject to Social Security.

Is Social Security the same as FICA?
Not exactly, but they are connected in some way. FICA taxes contribute to the budget for Medicare and a variety of Social Security benefits, such as retirement, disability, and survivor benefits. Employees accrue credits for Social Security benefits as they work and pay FICA taxes. Benefits for current retirees and other recipients are partially funded by FICA payments. If any money is left over, it is placed in the Social Security trust funds to be used for future benefit payments.

Is FICA the same as federal income tax?
FICA is a federal tax. The federal government mandates that most firms deduct three taxes from employee paychecks: the two FICA taxes, as well as the federal income tax. Federal unemployment taxes (FUTA) are also paid by employers, although no part of FUTA is deducted from workers' wages. You might also be required to withhold or pay state and local income taxes, state unemployment taxes (SUTA), and disability taxes depending on the state and local legislation where your business employs people.

Is FICA deductible?
Businesses can deduct the employer component of FICA from their expenses. The sums deducted from an employee's pay are not tax deductible. However, a deductible business expense is the salary or pay that you deduct FICA taxes from. On their yearly federal tax return, businesses can deduct employee salaries as well as the employer's share of FICA.

What is the FICA tax rate?
On income of $160,200 or less in 2023, wage earners will contribute 6.2% to Social Security. 6.2% is also paid on their behalf by their employers. Therefore, the overall Social Security tax rate is 12.4%. In 2023, Social Security will not tax any income over $160,200. On income now up to $200,000 for individuals, wage earners are required to pay the Medicare rate of 1.4 percent. They pay an additional 0.9% Medicare tax on any income over that. Employers are required to match the 1.45% rate, but not the 0.9% rate.

When will I get FICA refund?
A FICA reimbursement request takes time to process. The time it takes the IRS to examine your request and release your refund can range from three to four months.

What FICA tax means for me ?
As an employee, your total FICA tax obligation for 2023 is 7.65%, or 6.2% of your gross income for Social Security and 1.45% of your gross income for Medicare. Unlike Medicare, which is really increased by 0.9% if you earn more than a particular amount in a calendar year, Social Security taxes have a maximum based on your earnings, which is set at $160,200 for 2023. The minimum filing amount is $200,000 for single taxpayers and $250,000 for married couples filing jointly.
These taxes will be automatically deducted from your pay by your employer. Additionally, it will match your FICA tax contributions, resulting in an annual FICA tax payment per employee of a total of 15.3%. Independent contractors are liable for self-employment tax, which is similar to the FICA tax in that it covers Social Security and Medicare taxes, even though they are not subject to the FICA tax. Independent contractors are responsible for paying a total of 15.3% in taxes annually.

What are the advantages of FICA ?
Everyone, whether they have a disability or are just elderly, will eventually need to rely on Social Security services. You are funding benefits that you will probably utilize in the future. The FICA tax is immediately deducted from your income, unlike federal or state taxes, so you never have to worry about it.

What are the disadvantages of FICA ?
With very few exceptions, all U.S. employees must pay this tax, regardless of whether they utilize its services. The Medicare element of the FICA tax does not have an annual cap, although the Social Security portion does. For single taxpayers filing a single return, you are also charged an additional 0.9% Medicare tax for wages over $200,000 (and over $250,000 for married taxpayers filing jointly).