What is FICA Tax & How it Works : Rates & Exemptions

FICA stands for Federal Insurance Contributions Act, which is a U.S. federal payroll tax that funds Social Security and Medicare programs. FICA taxes are withheld from employees’ paychecks and are also contributed by employers. The tax consists of two components, Social Security Tax and Medicare Tax. Social Security gives money to retired people, disabled individuals, and some widows and widowers. Medicare is a program that helps older people and some disabled people pay for their medical needs.

Geeky Takeaways:

• The FICA tax, integral to the U.S. tax system, ensures funding for Social Security and Medicare programs.
• Social Security benefits include retirement income, support for the disabled, and assistance to surviving spouses and children of deceased workers.
• Medicare provides health insurance to people aged 65 and older and some younger individuals with disabilities.

How do FICA Taxes Work?

The FICA taxes are like a savings plan taken directly from workers’ paychecks in the United States to support two big programs, Social Security (12.4%) and Medicare (2.9%). Every time someone earns money from a job, the government takes a small part of it for these taxes. This includes money for Social Security, which gives financial help to older people, those who can’t work because of disabilities, and families who have lost a worker. The other part of the tax goes to Medicare, which is health insurance mainly for people over 65. Both employees and employers share the cost, each paying half of the total taxes needed for these programs. So, as people work and pay into FICA, they are contributing to the funds that will support them and others in retirement or in need of healthcare.

As of 2022, the rates for Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA) are as follows,

1. Social Security Tax

• Employee Rate: 6.2% of wages up to a certain income threshold. This threshold is $1,47,000 for 2022.
• Employer Rate: Also 6.2% of wages up to the same income threshold ($1,47,000 for 2022).

2. Medicare Tax

• Employee Rate: 1.45% of all wages, with no income limit.
• Employer Rate: Also 1.45% of all wages, with no income limit.

3. Additionally, there is an Additional Medicare Tax of 0.9% that applies to individuals with higher incomes:

• Employee Rate: 0.9% on wages above $2,00,000 for single filers and $2,50,000 for married couples filing jointly.
• Employer Rate: There is no corresponding employer rate for the Additional Medicare Tax; it is only withheld from employee wages.

Who Pay FICA Tax and Why?

FICA tax is paid by both employees and employers in the United States.

1. Employees pay FICA tax as part of their contribution to Social Security and Medicare, which are federal programs providing benefits like retirement income, disability income, and health insurance for older and some disabled Americans. The deduction from their paycheck is automatic and goes directly towards funding these programs.

2. Employers are also required to contribute to FICA for each of their employees. This is part of the employer’s responsibility to help fund the social safety net that Social Security and Medicare provide. The employer’s contribution matches the amount deducted from the employee’s wages, effectively doubling the contribution to these programs.

Self Employed Contribution Act (SECA): Self-employed individuals pay both the employee and employer portions of the FICA tax, covering their contributions to Social Security and Medicare.

How are FICA Taxes Calculated?

Let’s assume an employee, John, earns a salary of $50,000 per year. Calculate the respective FICA tax.

1. Social Security Tax Calculation

Rule:

Employee’s Social Security Tax: 6.2% of John’s wages up to the income threshold ($1,47,000 for 2022).

Employer’s Social Security Tax: Also 6.2% of John’s wages up to the same income threshold.

Employee’s Social Security Tax = 6.2% of $50,000 = 0.062 × $50,000 = $3,100

Employer’s Social Security Tax = $3,100 (matching the employee’s contribution)

2. Medicare Tax Calculation

Rule:

Employee’s Medicare Tax: 1.45% of all of John’s wages.

Employer’s Medicare Tax: Also 1.45% of all of John’s wages.

Employee’s Medicare Tax = 1.45% of $50,000 = 0.0145 × $50,000 = $725

Employer’s Medicare Tax = $725 (matching the employee’s contribution)

3. Additional Medicare Tax Calculation (if applicable)

Rule: If John’s annual salary exceeds the threshold of $200,000 for single filers, he will be subject to an additional Medicare tax of 0.9% on wages above $200,000.

4. Total FICA Taxes

Rule:

Total Employee FICA Taxes = Employee’s Social Security Tax + Employee’s Medicare Tax + Additional Medicare Tax (if applicable)

Total Employer FICA Taxes = Employer’s Social Security Tax + Employer’s Medicare Tax

Total Employee FICA Taxes = $3,100 (Social Security) + $725 (Medicare) + $0 (Additional Medicare) = $3,825

Total Employer FICA Taxes = $3,825

Wage Base Limits of FICA Tax

The wage base limits of FICA tax refer to the maximum amount of earnings subject to Social Security tax. These limits determine the maximum amount of wages on which employees and employers must pay Social Security tax. Here are the wage base limits for FICA tax,

1. Social Security Tax

• For 2022, the wage base limit for Social Security tax is $147,000. This means that the first $147,000 of an employee’s wages are subject to Social Security tax. Any earnings above this threshold are not subject to Social Security tax.
• Employers also contribute Social Security tax on wages up to the same income threshold of $147,000.

2. Medicare Tax

• There is no wage base limit for Medicare tax. All wages earned by an employee are subject to Medicare tax at a rate of 1.45%, with an additional 0.9% for individuals with higher incomes.

FICA Tax Exemptions

1. Student Exemption: Students employed by a school, college, or university where they are also enrolled and regularly attending classes may be exempt from FICA taxes on wages earned from their work at the educational institution.

2. Exemption for Certain Religious Groups: Members of recognized religious groups, such as ministers, priests, or members of religious orders, may be exempt from paying FICA taxes on income earned in the exercise of their duties as ordained, commissioned, or licensed ministers or members of religious orders.

3. Exemption for Government Employees: Certain government employees, such as federal employees covered under the Federal Employees Retirement System (FERS), may be exempt from paying Social Security and Medicare taxes. Instead, they may be covered by alternative retirement and healthcare systems.

4. Exemption for Railroad Employees: Railroad employees covered under the Railroad Retirement Act may be exempt from paying Social Security and Medicare taxes and instead contribute to the Railroad Retirement program.

5. Exemption for Certain Student Employees: Full-time students employed by their college or university under a work-study program or other employment arrangement may be exempt from paying FICA taxes on their wages.

Do Non-US Citizens have to pay FICA Taxes?

Yes, non-U.S. citizens who work in the United States usually have to pay FICA taxes, just like U.S. citizens. This includes both Social Security and Medicare taxes. The requirement to pay these taxes depends on their employment status and the type of visa they hold. However, there are some exceptions. Certain nonresident aliens, such as those on specific types of visas (like J-1, F-1, M-1, or Q-1 visas), and certain types of income may be exempt from FICA taxes under specific conditions. Also, the United States has tax treaties with some countries that might exempt their citizens from paying these taxes while working in the U.S.

In general, if a non-U.S. citizen is working in the United States and does not fall under an exemption category, they are required to pay FICA taxes.

Conclusion

In conclusion, FICA tax, a key part of the U.S. payroll system, supports essential programs like Social Security and Medicare. This tax ensures that workers have retirement and healthcare benefits, contributing to a stable and secure future for all. Both employees and employers share the responsibility of funding these crucial services. With its direct impact on millions of Americans, understanding FICA tax is vital for financial planning and compliance. As the workforce evolves and the population ages, the significance of FICA tax remains high, underlining its role in the nation’s economic health and social welfare.

FICA Tax – FAQs

What is FICA tax in USA?

FICA is a U.S. federal payroll tax. It stands for the Federal Insurance Contributions Act and is deducted from each paycheck. Your nine-digit number helps Social Security accurately record your covered wages or self-employment. As you work and pay FICA taxes, you earn credits for Social Security benefits.

How much foreign income is tax free in USA?

In the USA, the Foreign Earned Income Exclusion (FEIE) for 2023 allows U.S. citizens or resident aliens to exclude up to $120,000 of foreign earned income from U.S. taxes if they meet certain requirements related to living and working abroad.

What income is subject to FICA?

The FICA tax rate is applied to all taxable compensation. This includes salary, wages, tips, bonuses, commissions, and taxable fringe benefits. IRS Publication 15-B has a chart of various fringe benefits that are subject to FICA .

Is h1b resident alien?

If you meet the substantial presence test and have been in the U.S. on an H-1B visa for the entire calendar year, you are considered a full-year resident for U.S. tax purposes. If you fail the substantial presence test, you are considered a nonresident alien unless you qualify for and make a special election.