Federal Insurance Contributions Act (FICA)
The Federal Insurance Contributions Act (FICA) is a U.S. federal law that mandates a payroll tax to fund Social Security and Medicare. FICA contributions are taken from employees’ wages and matched by employers, with the funds supporting retirement, disability, and healthcare benefits for eligible individuals.
FICA consists of two main components:
- Social Security tax: A portion of the FICA tax goes toward funding Social Security benefits. The current rate is 6.2% for employees and employers, applied to income up to a certain limit (known as the wage base limit).
- Medicare tax: The other portion supports Medicare, the federal health insurance program for people 65 and older, and it is taxed at 1.45% for both employees and employers, with no wage limit.
For example, if an employee earns $50,000 in a year, the FICA contributions would be:
- Social Security: 6.2% of $50,000 = $3,100
- Medicare: 1.45% of $50,000 = $725
The total FICA contribution from the employee would be $3,825, with an equal amount contributed by the employer.
In cases where an employee earns above the wage base limit for Social Security, any earnings above this cap are not subject to the Social Security portion of FICA. For instance, if the wage base limit is $160,200 and an employee earns $200,000, they would pay 6.2% on $160,200, but not on the additional $39,800.