If you work for an employer, you will see FICA taxes among several types of taxes withheld from you on your pay stub. Here’s a look at what the FICA tax is and how it is calculated.
What Is FICA?
FICA stands for the Federal Insurance Contributions Act. This law mandates that employers withhold taxes from employee pay and make matching contributions to fund the Social Security and Medicare programs.
The law that created the FICA tax was passed in 1935. The funds are used to provide a retirement savings and insurance program for working Americans. The taxes are primarily used to fill the reserves for the Social Security benefits program for retirees. In addition to Social Security, FICA taxes are funneled into the Medicare program.
The FICA tax is designed to provide support for retirees who qualify for benefits. The idea is that as you work, you pay taxes and get credits that are applied to your retirement paychecks later.
[READ: How Much You Will Get From Social Security.]
To earn a Social Security credit in 2023, you need to earn at least $1,640 and pay FICA taxes on that amount. Every year, you can receive up to four credits. You’ll need to make at least $6,560 to receive these four credits. Once you have earned at least 40 credits, you will be eligible to receive Social Security retirement benefits beginning at age 62.
Paying FICA taxes also qualifies you for disability and life insurance benefits. If you become disabled, you may be eligible for Social Security disability benefits if you meet certain criteria and satisfy the minimum number of Social Security credits for your age. If you die, Social Security survivor benefits may also be available for your eligible family members, such as minor children and a surviving spouse who cares for young children or is age 60 or older.
FICA Tax Rates
Both employees and employers pay FICA taxes at the same rate. FICA taxes are divided into two parts: Social Security tax and Medicare tax. The Social Security tax rate is 6.2% of wages for 2023, and the Medicare tax rate is 1.45% of wages.
Together, these make up a tax rate of 7.65% for FICA taxes. “For employees, the employer withholds the FICA tax from their paycheck and then matches their contribution by paying the same amount themselves,” says Greg Goff, a certified financial planner and founder of Sound Wealth Management in Greenville, South Carolina. In all, the FICA tax paid in from employees and employers comes to 15.3%. “Self-employed individuals are responsible for paying the full FICA tax themselves,” Goff says.
[Read: How to Minimize Social Security Taxes.]
FICA Tax Limits
The Social Security wage base is set at $160,200 in 2023. You’ll pay the Social Security tax on 6.2% on your earnings up to $160,200. “Any earnings above this threshold should not be taxed toward Social Security,” says Michael Minter, managing partner and financial advisor at Mintco Financial in Tampa, Florida.
Medicare tax does not have an earnings limit, so you’ll be expected to pay the 1.45% tax on all your earnings. Beyond that, if you file taxes as a single person and earn more than $200,000 a year, you have to pay an additional Medicare tax. This tax is calculated at 0.9% of your wages above the $200,000 mark. If you are married and file jointly, that additional tax will apply to earnings above $250,000.
While the FICA tax is paid by most workers, the tax doesn’t apply to all paychecks. Payments that are not subject to FICA taxes include:
— Qualified retirement plan contributions from employers.
— Services performed by students employed by a school, college or university.
— Services performed by children under age 18 who are employed by their parents.
— Some church and qualified church-controlled organization wages.
— Some state and local government salaries.
State and local government employees in some states who are entitled to a pension may only be required to pay the Medicare portion of FICA taxes. If you are an employee of religious organization, your organization could qualify to claim an exemption from the FICA tax. Employees who are exempt from FICA won’t have to pay Social Security of Medicare tax. However, they won’t receive the benefits from the system later.
[READ: You May Be Getting More From Social Security Than You Think]
How to Calculate Your FICA Tax
When you start a new job, you’ll typically fill out a W-4 form. This form includes information such as your marital status and number of dependents, which ultimately determines the amount that will be taken out for taxes.
You can calculate how much you’ll pay in FICA taxes by multiplying your salary by 7.65%, accounting for any exceptions or limits that might apply to your situation. For example, if you earn $60,000, you will pay $4,590 as a FICA contribution (60,000 x 0.0765). This accounts for Social Security tax (6.2%) and Medicare (1.45%). “There is no way to opt out of these two,” Minter says. “They are deducted directly from the employee’s gross pay.”
If you’re considering starting your own business, you’ll want to think about FICA taxes. “Self-employed individuals, especially those new to entrepreneurship, often overlook an important distinction regarding FICA taxes and are met with an unwelcome surprise when they file their taxes,” says David Fowler, president and financial coach at High Mountain Financial Coaching LLC in Hawthorne, New Jersey. “Self-employed individuals have to pay both the employees’ half and the employers’ half — so they pay the full 15.3%.”
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What Is the FICA Tax? originally appeared on usnews.com
Update 05/16/23: This story was published at an earlier date and has been updated with new information.