Understanding Payroll Taxes: A Simple Guide to FICA Contributions

The FICA, also known as the Federal Contributions Act, is a federal payroll tax in the United States is created to fund two main programs of the government: Social Security and Medicare. The act ensures that employees and employers both contribute to the retirement, disability, and health insurance benefits for retired or disabled individuals who are not capble to earning their own income. 

At its core, the FICA taxes are not standalone; rather, they are a combination of two taxes that are automatically deducted from the paycheck of an employee. The tax is mandatory for the majority of employees and employers in the country. 

How does the FICA tax work?

Social Security tax covers things like retirement, survivor, and disability benefits. Both you and your employer chip in 6.2% of your wages, so together that’s 12.4%. But this only applies up to a certain amount you earn each year. Once you hit that cap, you only pay the Medicare part.

On the other hand, the Medicare tax pays for hospital insurance if you’re eligible. You and your employer each pay 1.45% of your wages, so 2.9% in total. There’s no upper limit here; every dollar you earn gets taxed for Medicare.

If you earn more, let’s say over $200,000 as a single filer, you pay an extra 0.9% for the Additional Medicare Tax. Your employer doesn’t match this bit; it just comes out of your paycheck, which makes this the total FICA tax rate deducted from your wage. 

Together, both the employee and the employer contribute to the FICA taxation, which is a total sum of 15.3% of the wages. For individuals who are self-employed, the SECA (Self-Employment Contributions Act) requires them to pay the entire amount, as there is no division here. Understanding the FICA taxes provides you with a better understanding of your payroll. 

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