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Federal Insurance Contributions Act (FICA) Tax

Lia Kopin-Green
April 13, 2023

What is the Federal Insurance Contributions Act (FICA) Tax?

The Federal Insurance Contributions Act (FICA) Tax is a payroll tax that is paid by both employees and employers in order to fund Social Security and Medicare. The primary principle underlying the act is that individuals who are employed should contribute a portion of their earnings to support Social Security and, later on, Medicare. This ensures that they can access financial and healthcare benefits in their later years based on their contributions.

FICA taxes are calculated by deducting a percentage of an employee's earnings. 

Key Takeaways

  • The Federal Insurance Contributions Act (FICA) Tax is a payroll tax paid by both employees and employers.
  • The money collected from this tax is used to fund Social Security and Medicare programs.
  • The amount of FICA contributions withheld from a worker's pay is based on their gross wages, meaning the total amount of their earnings before any deductions or taxes are applied.

Understanding FICA Taxes

The purpose of FICA taxes is to provide funding for two primary programs: Social Security and Medicare. Let’s dive deeper into these two mechanisms below.

  • Social Security: The Social Security program provides retirement, disability, and surviving family member benefits. By principle, the Social Security program works on a pay-as-you-go basis, meaning that current workers pay into the program to support current beneficiaries. As of 2022, the current Social Security tax rate is 6.2% for both employees and employers up to a maximum wage base of $147,000. If an individual’s wages exceed the maximum wage base of $147,000 in 2022, they will no longer be subject to Social Security taxes for that year.
  • Medicare: Medicare taxes are levied to provide healthcare benefits to eligible individuals who are 65 or older or have certain disabilities or diseases. This federal health insurance program covers a vast range of medical services such as hospital stays, doctors visits and prescription medications. The current Medicare tax rate for 2022 is 1.45% for both employees and employers. There is no wage base limit for Medicare taxes. 

The Self-Employed Contributions Act (SECA)

The Self-Employed Contributions Act (SECA) is a tax law that requires self-employed individuals to pay Social Security and Medicare taxes on their income. While employees have their Social Security and Medicare taxes withheld from their paychecks by their employer, self-employed taxpayers are solely responsible for paying both the employee and employer portions of these taxes. Sole proprietors, for instance, are responsible for paying 12.4% of their income towards Social Security and 2.9% towards Medicare. 

While self-employed individuals do in fact pay more than wage earned, it is crucial to keep in mind that they get a tax break. Self-employed taxpayers have the opportunity to deduct half of their self-employment tax on their individual income tax return.

Bottom Line

In conclusion, understanding FICA and SECA taxes is essential when it comes to filing your taxes properly and efficiently. Although the complexities of these taxes can be challenging, remember that legal assistance is available to you just a click away. Get in touch with a top-tier tax lawyer in your area today with Attorney At Law.

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