What Does FICA Include? Unpacking Payroll Taxes

Payroll taxes, also known as employment taxes, refer to the taxes that an employer must withhold from their employees’ wages, as well as pay themselves. These taxes are required to cover Social Security and Medicare programs, as well as other government programs. The Federal Insurance Contributions Act (FICA) is a federal law that governs payroll taxes in the United States. FICA taxes are paid by both employees and employers, with the employee’s portion deducted from their paycheck and the employer’s portion paid directly to the government. In this article, we will unpack payroll taxes and take a closer look at what FICA includes.

What is FICA?

The Federal Insurance Contributions Act, or FICA, is a federal law that establishes the system for collecting payroll taxes in the United States. FICA taxes fund Social Security and Medicare programs, as well as other government programs. The taxes required by FICA are split between the employee and employer, with each responsible for paying a specific percentage of the total amount. FICA taxes are collected automatically by the employer and sent to the IRS on a regular basis.

What programs does FICA fund?

The majority of FICA taxes fund Social Security and Medicare programs. Social Security provides retirement, disability, and survivor benefits to eligible workers and their families. Medicare is a health insurance program that provides coverage for individuals who are 65 years of age or older, as well as individuals with certain disabilities or medical conditions. A portion of FICA taxes also funds the Disability Insurance Trust Fund and the Hospital Insurance Trust Fund, which provide disability and hospital insurance to eligible individuals, respectively.

What is included in FICA?

FICA taxes consist of two parts: Social Security taxes and Medicare taxes. The Social Security tax is 12.4% of an employee’s wages, with 6.2% paid by the employee and 6.2% paid by the employer. The Medicare tax is 2.9% of an employee’s wages, with 1.45% paid by the employee and 1.45% paid by the employer. For high-income earners, there is an additional 0.9% Medicare tax that is withheld once an employee’s wages exceed $200,000 in a single year.

What is the Social Security tax?

The Social Security tax is a payroll tax that is collected to fund the Social Security program. The tax rate is 12.4%, with 6.2% paid by the employee and 6.2% paid by the employer. This tax is withheld from an employee’s wages up to a set limit, which is adjusted annually. For 2021, the limit is $142,800. Any wages earned over this amount are not subject to the Social Security tax.

What is the Medicare tax?

The Medicare tax is a payroll tax that is collected to fund the Medicare program. The tax rate is 2.9%, with 1.45% paid by the employee and 1.45% paid by the employer. There is no wage limit for the Medicare tax, which means that all wages earned by an employee are subject to this tax. For high-income earners, there is an additional 0.9% Medicare tax that is withheld once an employee’s wages exceed $200,000 in a single year.

How are FICA taxes calculated?

FICA taxes are calculated as a percentage of an employee’s wages, up to a set limit. For 2021, the Social Security wage limit is $142,800. Any wages earned over this amount are not subject to the Social Security tax. There is no wage limit for the Medicare tax. As an example, if an employee earns $50,000 in 2021, their total FICA taxes would be calculated as follows:

Employee’s share Employer’s share Total
Social Security $3,100 ($50,000 x 6.2%) $3,100 ($50,000 x 6.2%) $6,200
Medicare $725 ($50,000 x 1.45%) $725 ($50,000 x 1.45%) $1,450
Total $3,825 $3,825 $7,650

What is not included in FICA?

There are several types of income that are not subject to FICA taxes. These include:

  • Income earned from self-employment
  • Income earned from investments
  • Income earned from rental property
  • Income received as a form of public assistance

What is self-employment income?

Self-employment income refers to income earned by an individual who is in business for themselves, rather than being an employee of another company. Self-employed individuals must pay self-employment taxes, which are similar to FICA taxes but are paid entirely by the self-employed individual. The self-employment tax rate is currently 15.3% of net self-employment income, with 12.4% going towards Social Security and 2.9% going towards Medicare. The maximum amount of self-employment income subject to Social Security tax for 2021 is $142,800.

Why is FICA important?

FICA taxes are an essential source of revenue for government programs that provide benefits to millions of Americans. Social Security and Medicare, in particular, are critical programs that provide financial support to retired and disabled individuals, as well as those who are suffering from long-term illnesses or medical conditions. Payroll taxes generated by FICA help ensure the long-term sustainability of these programs so that they can continue to support those who need them the most.

What happens if an employer fails to pay FICA taxes?

If an employer fails to pay FICA taxes, they may be subject to penalty fees and back taxes. The IRS may also impose liens on the employer’s assets to recover the unpaid taxes. Employees may also be affected if their Social Security and Medicare earnings records are not correctly reported, which may lead to reduced benefits in the future.

Can employees opt-out of FICA?

No, employees cannot opt-out of FICA. These payroll taxes are mandatory for all eligible employees and their employers.

Conclusion

Unpacking payroll taxes can be challenging, but it’s essential to understand what is included in FICA taxes as they are a crucial source of revenue for government programs that help millions of Americans. By understanding how these taxes are calculated and what they fund, employees and employers can better prepare for their financial future and ensure compliance with federal tax laws.

Common Questions and Answers

  • What is the FICA tax rate?

    The FICA tax rate is 15.3% of an employee’s wages, split between the employee and employer. This rate is 12.4% for Social Security and 2.9% for Medicare, with an additional 0.9% for high-income earners.
  • What is the Social Security wage limit?

    The Social Security wage limit is the maximum amount of wages that are subject to the Social Security tax. For 2021, the limit is $142,800.
  • What is self-employment tax?

    Self-employment tax refers to the taxes that self-employed individuals must pay to fund Social Security and Medicare programs. The self-employment tax rate is currently 15.3% of net self-employment income, with 12.4% going towards Social Security and 2.9% going towards Medicare.

References

  • IRS.gov. (2021). Federal Insurance Contributions Act (FICA) Tax. [online] Available at: https://www.irs.gov/taxtopics/tc751 [Accessed 11 Oct. 2021].
  • Social Security Administration. (n.d.). Understanding the Benefits. [online] Available at: https://www.ssa.gov/benefits/ [Accessed 11 Oct. 2021].
  • Medicare.gov. (n.d.). What is Medicare? [online] Available at: https://www.medicare.gov/what-medicare-covers/what-is-medicare [Accessed 11 Oct. 2021].

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