What is FICA?

FICA stands for the Federal Insurance Contributions Act, which is a U.S. law that mandates payroll taxes to fund Social Security and Medicare programs.

What is FICA?

FICA stands for the Federal Insurance Contributions Act, which is a U.S. law that mandates payroll taxes to fund Social Security and Medicare programs. These programs provide benefits to retirees, disabled individuals, and survivors, as well as health coverage for the elderly.

Key Aspects of FICA

1. Social Security Tax:
   • Purpose: Funds the Social Security program, which provides benefits for retirees, disabled individuals, and survivors of deceased workers.
   • Rate: As of 2024, the Social Security tax rate is 6.2% of gross wages, up to a certain annual limit known as the Social Security wage base. For 2024, this limit is $168,600. Income above this limit is not subject to the Social Security tax.
2. Medicare Tax:
   • Purpose: Funds the Medicare program, which provides health insurance to people aged 65 and older, as well as certain younger individuals with disabilities.
   • Rate: The Medicare tax rate is 1.45% of all gross wages, with no income limit. In addition, there is an additional Medicare tax of 0.9% for high-income earners. This additional tax applies to wages above $200,000 for single filers and $250,000 for married couples filing jointly.
3. Employee and Employer Contributions:
   • Employee Contribution: Employees contribute half of the total FICA tax rates (6.2% for Social Security and 1.45% for Medicare) through payroll withholding.
   • Employer Contribution: Employers match the employee’s contribution, contributing an equal amount (6.2% for Social Security and 1.45% for Medicare) on behalf of the employee.

Example Calculation

For an employee earning $60,000 annually in 2024:

• Social Security Tax: 6.2% of $60,000 Employee Contribution=0.062×60,000=$3,720 Employer Contribution=0.062×60,000=$3,720
• Medicare Tax: 1.45% of $60,000
  • Employee Contribution=0.0145×60,000=$870 Employer Contribution=0.0145×60,000=$870

Reporting and Compliance

• Withholding: Employers are responsible for withholding FICA taxes from employees’ paychecks and matching the amount.
• Remittance: Employers must remit both the employee’s and employer’s FICA contributions to the Internal Revenue Service (IRS).
• Reporting: Employers report FICA taxes on quarterly payroll tax returns (Form 941) and annual tax returns (Form 940). They also provide employees with Form W-2 at the end of the year, which details their FICA contributions.

Impact on Employees and Employers

• Employees: FICA taxes are a mandatory payroll deduction that funds future Social Security and Medicare benefits. While these taxes reduce take-home pay, they contribute to social safety nets.
• Employers: Employers have the administrative responsibility of withholding, matching, and remitting FICA taxes. Compliance is crucial to avoid penalties and ensure that contributions are accurately reported and paid.

In summary, FICA is a federal law that establishes payroll tax requirements to support Social Security and Medicare programs. It involves contributions from both employees and employers, with specific rates and income limits affecting how much is deducted and matched.