How FICA Tax is Calculated and Collected
The Federal Insurance Contributions Act (FICA) tax is a payroll tax that is mandated by the Internal Revenue Service (IRS) in the United States. It is an important component of the Social Security and Medicare programs, which provide retirement, disability, and healthcare benefits to eligible individuals. Understanding how FICA tax is calculated and collected is essential for both employers and employees.
What is FICA Tax?
FICA tax is divided into two parts: Social Security tax and Medicare tax. The Social Security tax funds retirement, disability, and survivor benefits, while the Medicare tax goes towards the Medicare program, which provides healthcare coverage for eligible individuals over the age of 65.
Calculating Social Security Tax
As of 2021, the Social Security tax rate is 6.2% for both employers and employees. This means that if you earn $50,000 in taxable wages, you and your employer will each contribute $3,100 towards Social Security ($50,000 * 0.062).
However, it's worth noting that the Social Security tax has a wage base limit. In 2021, the wage base limit is $142,800, which means that you and your employer will only pay Social Security tax on the first $142,800 of your taxable wages. If you earn more than this amount, you will not have to pay Social Security tax on the additional earnings.
Calculating Medicare Tax
The Medicare tax rate is 1.45% for both employers and employees. Unlike the Social Security tax, there is no wage base limit for Medicare tax. This means that you and your employer will each contribute 1.45% of your total taxable wages towards Medicare, regardless of the amount you earn.
In addition to the standard Medicare tax rate, high-income individuals may be subject to an additional Medicare tax of 0.9%. This additional tax applies to individuals who earn above a certain threshold, which is $200,000 for single filers and $250,000 for married couples filing jointly. If you meet these criteria, you will be required to pay the extra 0.9% on your earnings above the threshold.
Collection of FICA Tax
FICA tax is collected through the process of withholding. When you receive your paycheck, your employer is responsible for deducting the FICA tax amounts from your wages.
For example, if your gross earnings for a pay period are $2,000 and the FICA tax rate is 7.65% (6.2% for Social Security and 1.45% for Medicare), your employer will withhold $153 ($2,000 * 0.0765) from your paycheck and send it to the IRS on your behalf.
Employers also contribute an equal amount towards FICA tax based on the employee's earnings. This means that in addition to the $153 withheld from your paycheck, your employer will contribute an additional $153 towards FICA tax.
It's important to note that self-employed individuals are responsible for paying the full FICA tax amount themselves. This is known as the self-employment tax and it covers both the employer and employee portions of FICA tax. Self-employed individuals must calculate and pay their FICA tax when filing their annual tax return.
Conclusion
Understanding how FICA tax is calculated and collected is crucial for employees and employers alike. By knowing the percentages and wage base limits, individuals can accurately estimate the amount of FICA tax they will owe. Employers must ensure proper withholding and timely submission of FICA tax payments to avoid penalties. By working together, FICA tax funds are collected to support the Social Security and Medicare programs, providing essential benefits to retirees, disabled individuals, and those in need of healthcare.