One of the dominating parts of our working life is paying taxes, and part of those taxes are governed by the Federal Insurance Contributions Act (FICA). FICA is a federal payroll tax that applies to both employees and employers that funds benefits for retirees, disabilities and the children of people that have passed away. FICA also funds the Medicare health benefit system.
FICA taxes are separate from federal income taxes, as the employee is responsible for their own federal income tax which helps fund federal government operations. FICA is split between employer and employee and the taxes fund only the benefit systems. While people often believe they will receive a benefit at a future time from paying into FICA, there is no actual right to Social Security or Medicare benefits. Eligibility requirements must be met and the benefits granted according to the rules of both Social Security and Medicare.
What Income is Exempt from FICA
The way FICA is setup there are some types of income and positions that are free from having to pay into the system.
- Students enrolled in a university that they also work part-time for, so long as the primary focus of the individual is on their education
- Non-resident aliens meeting certain criteria
- Some state government employees where the state offers alternative retirement options
- Employees under the age of 18 that work for their parents or as a newspaper carrier
- Certain emergency service workers that were not hired to be permanent employees
- Some real estate agents and sales people that are not paid hourly
- Some religious groups such as the Amish or Mennonites provided the individuals of the groups waive their rights to benefits
- Income above the annual earnings cap is exempt from paying the Social Security tax but not exempt from Medicare taxes
- Non-work income such as dividends, capital gains, interest payments, annuities and pensions
What is the FICA Tax Rate
The total FICA tax rate is set at 15.3 percent of an employee’s gross earnings, which is split down the middle so that the employee and employer each pay 7.65 percent. Most of that goes to Social Security, with 6.2 percent of each portion being designated for the old age, disability and survivor benefit programs. The remaining 1.45 percent is the Medicare portion.
Note that self employed workers do not have to pay into FICA, as they are subject to the Self Employed Contributions Act (SECA) which serves a similar function as FICA.
Calculating How Much is Owed
Calculating a regular employee’s necessary withholding means taking the gross wages, including any overtime, before any other deductions or taxes, and multiplying those wages by the Social Security percentage and the Medicare percentage. As an example, if an employee’s annual salary is $100,000 then the Social Security amount is $6,200 ($100,000 x 6.2%) and the Medicare portion is $1,450 for the year. The employer must match those same amounts when the tax is paid.
If an employee is paid more than the annual earnings then the Social Security amount must stop being withheld on the money that goes over that level, however the Medicare portion must still be deducted and paid appropriately. If too much is withheld, then anything over the the allowable amount must be refunded to the employee.
How FICA Taxes are Reported
Every quarter, of the year, employers are required to report the FICA withholdings to the IRS. The IRS has a specific form which requires that the amounts deducted from employees, the amounts owed by the employer themselves and the amounts paid all be included. The IRS has a specific system setup to receive payments from employers, called the Electronic Federal Tax Payment System (EFTPS). Payments into the EFTPS are generally made monthly or semi-weekly depending on the size of the deposits.
Importance of FICA
The reason FICA was created was to help Americans that were struggling after the Great Depression struck. Prior to the advent of Social Security, once a person was no longer able to work, they no longer had any income. Whether due to age, disability or other afflictions, if a person was unable to work then it was likely that they could no longer support themselves unless they had substantial personal savings.
With the New Deal under Roosevelt, the Social Security Act was signed into law and, along with it, FICA to fund the program. For the first time this gave Americans some peace of mind and security from the government that they would continue to have some support if they fell ill or could no longer work. While the programs are not perfect, they have grown and been heavily relied upon since their implementation, and as long as they remain in place then a safety net exists for those that need it.