What are FICA taxes?

FICA stands for the Federal Insurance Contributions Act.  FICA taxes are comprised of two separate taxes, social security and Medicare taxes, that are paid on wages earned for services performed.  Employers withhold and pay their employees’ share of the FICA taxes and also pay the employer share.

 

How the tax is calculated

Overview

The Center on Budget and Policy Priorities states that three-quarters of taxpayers pay more in payroll taxes than they do in income taxes. The FICA tax is considered a regressive tax on income (with no standard deduction or personal exemption deduction) and is imposed (for the years 2009, 2010 and 2011) only on the first $106,800 of gross wages, and increasing to $110,100 in 2012. The tax is not imposed on investment income (such as interest and dividends).

 "Regular" employees (most wage-earners)

Share of federal revenue from different tax sources. Individual income taxes (blue), payroll taxes/FICA (green), corporate income taxes (red).

For 2008, the employee's share of the Social Security portion of the tax is 6.2% of gross compensation up to a limit of $102,000 of compensation (resulting in a maximum of $6,324.00 in tax). For 2009 and 2010, the employee's share is 6.2% of gross compensation up to a limit of $106,800 of compensation (resulting in a maximum Social Security tax of $6,621.60). This limit, known as the Social Security Wage Base, goes up each year based on average national wages and, in general, at a faster rate than the Consumer Price Index (CPI-U). For the calendar years of 2011 and 2012, the employee's share has been temporarily reduced to 4.2% of gross compensation, with a limit of $106,800 for 2011 and $110,100 for 2012. The employee's share of the Medicare portion is 1.45% of wages, with no limit on the amount of wage subject to the Medicare tax. Since most payroll checks include FICA, Medicare, Social Security and a state tax, if applicable, 6.2% and 1.45% only create a portion of the total percentage an employee pays in to the IRS.

The employer is also liable for 6.2% Social Security and 1.45% Medicare taxes, making the total Social Security tax 12.4% of wages, and the total Medicare tax 2.9%. (Self-employed people are responsible for the entire FICA percentage of 15.3% (= 12.4% + 2.9%), since they are in a sense both the employer and the employed; however, see the section on self-employed people for more details.)

If a worker starts a new job halfway through the year and has already earned the wage base limit with the old employer for Social Security purposes, the new employer is not allowed to stop withholding until the wage base limit has been earned with the new employer without regard to the wage base limit earned under the old employer. There are some limited cases, such as a successor-predecessor transfer, in which the payments that have already been withheld can be counted toward the year-to-date total.

If a worker has overpaid toward Social Security by having more than one job or by having switched jobs during the year, that worker can file a request to have that overpayment counted as tax paid when he or she files a Federal income tax return. If the taxpayer is due a refund, then the FICA overpayment is refunded.

 Self-employed people

Effective payroll tax rate for different income groups. Payroll includes employee and employer FICA. Income includes taxable and nontaxable.

A tax similar to the FICA tax is imposed on the earnings of self-employed individuals, such as independent contractors and members of a partnership. This tax is imposed not by the Federal Insurance Contributions Act but instead by the Self-Employment Contributions Act of 1954, which is codified as Chapter 2 of Subtitle A of the Internal Revenue Code, 26 U.S.C. § 1401 through 26 U.S.C. § 1403 (the "SE Tax Act"). Under the SE Tax Act, self-employed people are responsible for the entire percentage of 15.3% (= 12.4% [Soc. Sec.] + 2.9% [Medicare]); however, the 15.3% multiplier is applied to 92.35% of the business's net earnings from self-employment, rather than 100% of the gross earnings; the difference, 7.65%, is half of the 15.3%, and makes the calculation fair in comparison to that of regular (non-self-employed) employees. It does this by adjusting for the fact that employees' 7.65% share of their SE tax is multiplied against a number (their gross income) that does not include the putative "employer's half" of the self-employment tax. In other words, it makes the calculation fair because employees don't get taxed on their employers' contribution of the second half of FICA, therefore self-employed people shouldn't get taxed on the second half of the self-employment tax. Similarly, self-employed people also deduct half of their self-employment tax (schedule SE) from their gross income on the way to arriving at their adjusted gross income (AGI). This levels the amount paid by self-employed persons in comparison to regular employees, who don't pay general income tax on their employers' contribution of the second half of FICA, just as they didn't pay FICA tax on it either.

These calculations are made on Schedule SE: Self-Employment Tax, although that is not readily apparent to novice self-employed taxpayers, owing to the schedule's rather opaque name, which makes it sound like it is part of the general federal income tax. Some taxpayers have complained that Schedule SE's title should be changed to something such as "Self-Employment FICA Tax", so that its separateness from the general income tax is apparent, perhaps not realizing that the SE tax is not imposed by the Federal Insurance Contributions Act (FICA) at all, and that neither SE taxes nor FICA taxes are "income taxes" imposed under Chapter 1 of the Internal Revenue Code.

Exemption for certain full-time students

A special case in FICA regulations includes exemptions for student workers. Students enrolled at least half-time in a university and working part-time for the same university are exempted from FICA payroll taxes, so long as their relationship with the university is primarily an educational one. Medical residents working full-time are not considered students and are not exempt from FICA payroll taxes, according to a US Supreme Court ruling in 2011. In order to be exempt from FICA payroll taxes, a student's work must be "incident to" pursuit of a course of study, which is rarely the case with full-time employment.