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FICA (Federal Insurance Contributions Act) is the federal law that imposes Social Security & Medicare taxes on earned income. These are the added line items most employees see on their paychecks. Below is a breakdown of how these taxes work and how they impact you…..
Social Security Taxes
The current Social Security tax rate is 6.2% for employers and 6.2% for employees, for a total of 12.4%. Self-employed folks pay both the employer and employee rates. You can learn more about “self-employment” taxes at this link.
The current Medicare tax rate is 1.45% for employers and 1.45% for employees, for a total of 2.9%. As of the 2013 tax year, additional Medicare taxes of .9% are applied to the income of single filers that exceeds $200,000 and to income of married joint filers exceeding $250,000 ($125,000 for married separate filers). This .9% is paid only on the employee side, not the employer side like that of Social Security and regular Medicare taxes.
Wage Base Limits
Social Security taxes have a wage base limit, which is the maximum wage that’s subject to the tax for that individual, for that year. For earnings in 2019, that base limit was $132,900. For 2020, that limit is increased to $137,700. Once a taxpayer hits the wage base limit, social security taxes are no longer due.
Medicare does not have a wage base limit and is collected on all covered wages.
Paying into these “funds” is what later determines your retirement, survivors, and disability insurance benefits.
Contact us if you have questions on these taxes…happy to help!