Federal Insurance Contributions Act

What is the Federal Insurance Contributions Act?

The Federal insurance Contributions Act is an American law that has made a payroll tax mandatory on the paycheques of employees along with the contributions from employers to fund the Medicare and Social Security programs.

As far as self-employed people are concerned, there is a similar law known as Self-Employed Contributions Act (SECA). In a way, this federal program offers advantages to people with disabilities, retirees, and orphan children.

Explaining FICA

The contributions of FICA are mandatory, and their rates are set on an annual Basis. However, this annual changing may not be necessary. For instance, from 2019 to 2020, these rates have been stable so far.

The amount of payment majorly depends upon the employee’s Income. Thus, the higher the income, the higher would be the FICA payment. But, as far as Social Security contributions are concerned, there is a maximum wage, after which no contribution will be levied on extra income.

In 2020, the federal government has withheld this Social Security Taxes up to the wage of $137,700 annually. As of 2020, while the Social Security Tax Rate is 6.2%; the Medicare tax is 1.45%. Also, for an employer, it is required to pay a tax that is equal to the amount withheld from the employee’s Earnings.

Although Medicare contribution doesn’t have any maximum limit, it comes with an additional 0.9% tax on the income more than $200,000 for individuals and $250,000 for married couples. Thus, in total, this Medicare Tax would be 2.35%.

Example of FICA

Let’s understand this FICA concept with an example here. Suppose there is a person who is earning $50,000 and is paying $35,00 of Social Security tax and $700 of Medicare. Now, the employer of this individual will pay a similar amount.

On the other hand, an individual earning $250,000 would have to pay $12,305. In this example, the calculation turns a bit complex. Out of the first $132,900 earned, the person will pay 6.2% to Social Security, which will be $8.230.

Now, out of the first $200,000; the person will pay 1.45% for Medicare, which will be $2,900. Finally, out of the $50,000 from the $200,000 income, 2.35% will go to Medicare, which will be $1,175. In this last situation, the employer will only pay $11,130 as it is not his responsibility to pay for the additional 0.9% for an income that goes beyond $200,000.