The Federal Insurance Contributions Act (FICA) tax is a federal payroll tax that is levied on both employees and employers in the United States. The primary purpose of FICA tax is to fund social security and Medicare programs, which provide financial assistance to retired workers, disabled workers, and the unemployed. FICA tax is typically withheld from an employee's paycheck and is also paid by the employer as a matching contribution.
How FICA Tax Works
FICA tax is composed of two main components: the Old-Age, Survivors, and Disability Insurance (OASDI) tax and the Hospital Insurance (HI) tax. The OASDI tax funds social security benefits, while the HI tax funds Medicare benefits. The total FICA tax rate is 15.3% of an employee’s earnings, with 12.4% allocated to OASDI and 2.9% allocated to HI. Employees pay 6.2% of their earnings in OASDI tax and 1.45% in HI tax, while employers pay a matching 6.2% in OASDI tax and 1.45% in HI tax.
FICA Tax Rates
The FICA tax rates for employees and employers are as follows:
| Component | Employee Rate | Employer Rate |
|---|---|---|
| OASDI (Social Security) | 6.2% | 6.2% |
| HI (Medicare) | 1.45% | 1.45% |
| Total FICA Tax | 7.65% | 7.65% |
It's worth noting that the OASDI tax is subject to a wage base limit, which is adjusted annually for inflation. In 2022, the OASDI tax applies to the first $147,000 of an employee's earnings. Earnings above this threshold are not subject to OASDI tax. However, all earnings are subject to HI tax, regardless of the amount.
FICA Tax Exemptions and Exceptions
Certain individuals and organizations may be exempt from FICA tax or may have special rules apply to them. For example:
- Non-profit organizations may be exempt from FICA tax if they meet certain requirements.
- Government agencies may have special rules for FICA tax, such as the ability to opt out of social security coverage.
- Certain types of income, such as tips and self-employment income, may be subject to different FICA tax rules.
FICA Tax Implications
FICA tax has significant implications for employees, employers, and the overall economy. For example:
Employees may see a reduction in their take-home pay due to FICA tax withholding, but they may also be eligible for social security and Medicare benefits in the future. Employers must factor FICA tax into their payroll and benefits costs, but they may also be able to claim a tax deduction for their FICA tax payments.
The FICA tax also has implications for the overall economy, as it helps to fund social security and Medicare programs that provide financial assistance to millions of Americans. However, the FICA tax can also be a burden on businesses and individuals, particularly those with lower incomes or higher payroll costs.
What is the purpose of FICA tax?
+The primary purpose of FICA tax is to fund social security and Medicare programs, which provide financial assistance to retired workers, disabled workers, and the unemployed.
How is FICA tax calculated?
+FICA tax is calculated as a percentage of an employee’s earnings, with the employee paying 6.2% of their earnings in OASDI tax and 1.45% in HI tax, and the employer paying a matching 6.2% in OASDI tax and 1.45% in HI tax.
Are there any exemptions or exceptions to FICA tax?
+Yes, certain individuals and organizations may be exempt from FICA tax or may have special rules apply to them, such as non-profit organizations, government agencies, and certain types of income.
