FICA
Title: Understanding FICA: Contributions, Limits, and Exemptions
What Is FICA?
The Federal Insurance Contributions Act (FICA) is a U.S. payroll tax designed to fund essential federal programs—Social Security and Medicare. Both employees and employers contribute equally to these programs, providing benefits to retirees, individuals with disabilities, and children of deceased workers.
FICA Deduction Rates (2020):
- Social Security: 6.2 percent of employees’ gross wages
- Medicare: 1.45 percent of employees’ gross wages
2020 FICA Limits:
- Social Security: The maximum tax each for employees and employers is $8,537.40. No limit exists for Medicare tax.
FICA Salary Limits:
- Social Security: The 6.2 percent tax applies to earnings up to $132,900. Beyond this amount, employees are exempt from the Social Security tax.
- Medicare: No salary limit; all workers contribute to Medicare regardless of income.
Exemptions from FICA Taxes:
Individuals exempted from some or all of the FICA tax include:
- Those earning above $132,900.
- State and local government employees hired before 1984.
- State and local government employees, not covered by Section 218 Agreement, with the same employer since March 31, 1986, and part of a public retirement system.
- Members of recognized religious sects opposed to Social Security benefits.
- College students with on-campus jobs.
- Most non-immigrant and non-resident alien foreign students, scholars, teachers, and researchers.
- Foreign citizens working in the U.S. for a foreign government.
- Self-employed individuals earning less than $400.
FICA vs. Federal Income Tax:
FICA and federal income tax are distinct components. FICA is specific to earned income, covering salaries, wages, and bonuses. Federal income tax, on the other hand, encompasses all forms of income, including dividends, interests, short-term capital gains, annuities, and pensions.
Is FICA the Same as Social Security?
While FICA is not synonymous with Social Security, it serves as the funding source for Social Security benefits.
Consequences for Employers:
Employers failing to withhold employment and federal income taxes can face both criminal and civil sanctions. They are legally obligated to report and deposit these taxes through Form 941, the Employer’s Quarterly Federal Tax Return. Failure to comply may result in serious repercussions.