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Looking at your paycheck can be frustrating. You know your salary, but then when you look at your paycheck, it’s a lot lower than you anticipated. What is FICA tax and why is it coming out of your paycheck?
We explain the tax, why it benefits you, and what to expect below.
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What Is FICA Tax?
FICA taxes are a payroll tax in addition to income taxes. FICA stands for Federal Insurance Contributions Act and is a federal payroll tax. The FICA taxes you pay contribute to future retirement funds (Social Security income).
When you earn income and pay FICA taxes, you earn credits toward Social Security income. In 2020, you must earn at least $1,410 to earn a Social Security credit and each person may earn up to 4 credits per year. Eligible retirees need 40 credits to collect Social Security, which normally starts at age 62.
FICA also enables income earners to receive Social Security disability or life insurance should you become disabled (and unable to work) or die. If you die, your spouse or children may receive your benefits.
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Who Must Pay FICA?
Everyone who works pays FICA tax. This includes anyone employed by a company and who owns their own business.
If you work for someone, your employer pays half the FICA tax, and you cover the other half. If you own your own business, you are responsible for the full amount, but may deduct one half of your self-employment tax on your tax returns.
Employers are responsible for sending in the FICA payments. They usually send them in bi-weekly or monthly. They must also reconcile with the IRS quarterly, filing Form 941, which is due on the last day of the month following the end of a quarter. For example, the first quarter’s form would be due April 30th.
Is FICA Tax the Same as Social Security?
FICA taxes are made up of two parts - Social Security and Medicare. The Social Security portion is the Old Age, Survivors, and Disability Insurance. This is what protects you in retirement, disability, or survivors after your death.
Your FICA tax is 7.65 percent of your income. Of that amount 6.2 percent covers OASDI, and 1.45 percent covers Medicare. Employees who earn over $200,000 also pay an additional 0.9 percent.
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Does Everyone Have to Pay FICA Tax?
Almost everyone pays FICA taxes, even resident aliens and nonresident aliens (in most cases). It applies to all full-time and part-time employees, as well as the self-employed.
Groups that don’t pay FICA taxes, however, are ineligible for Social Security or Medicare benefits.
How Is FICA Tax Calculated?
Total FICA tax is 15.4 percent of your earnings. However, you and your employer split it down the middle 50/50. Your employer pays 7.65 percent and you pay 7.65 percent.
You pay FICA taxes on all income up to $137,500 (the limit for 2020). However, the limits change (increase) each year.
Calculating FICA tax is easy.
Take your gross pay (pay before taxes) and multiply it by 6.2 percent to calculate your Social Security taxes and 1.45 percent for your Medicare taxes.
Here’s an example.
Your gross earnings are $5,000. You’d pay the following taxes:
Social Security taxes - $310
Medicare taxes - $72.50
Your employer would pay the same amount on your behalf.
Is Any Income Exempt From FICA Tax?
Certain people/income are exempt from FICA tax including:
Income earned by college students working on campus in their course of study
Children under the age of 18 who work for their parents
Retirement contributions from an employer
International students, teachers, physicians, Au pairs, and other aliens here temporarily with F-1, J-1, M-1, or Q-1 status
Foreign government employees
Some Amish groups
The following exclusions to exemptions apply:
Spouses or children of F-2, J-2, M-2, or Q-3 immigrants
Immigrants not employed in a job close to the reason for the visa
Immigrants who change their status to a status that isn’t exempt after being exempt
Immigrants who become resident aliens
International students here for more than 5 years, as they become Resident Aliens and must pay FICA tax
It’s important to note that any income you defer to your retirement account (401K) doesn’t reduce your FICA tax responsibility. All income is subjected to FICA, but your contributions to your 401K lower your federal income tax liability, which is a separate tax.
The only way to ‘avoid’ FICA is on funds contributed to a qualified HSA for medical expenses or FSA for childcare expenses. The self-employed also don’t pay FICA taxes on any legitimate business expenses they write off.
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Is FICA the Same as Federal Income Tax?
Federal income tax and FICA are similar, but not the same. FICA tax applies to all ‘earned’ income or income you make from a job. Federal income tax covers all income, not just earned income. This includes dividend income, capital gains, interest, and pension income.
Federal income tax is also eligible for many deductions. Any deductions you qualify for on Schedule A, lower your federal income tax, but not FICA. Your employer must pay 15.4 percent on each paycheck (split 50/50).
Is It Possible to Overpay FICA Taxes?
It’s rare, but it does happen if you change employers. Since your FICA taxes are calculated on your gross income, your employer knows when to stop collecting the tax, if you reach the $137, 500 limit.
If you change employers, though, you may hit the limit, but they wouldn’t know. If you have a professional do your taxes, though, they will catch the error right away and file the appropriate tax forms to ensure you get the money owed to you.
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What Is FICA Tax and Why Should You Care?
FICA tax is required and it lowers your paycheck. You can easily calculate how much of your pay you’ll lose to FICA by multiplying it by 7.65 percent.
FICA tax may seem like a burden, but the fact that it’s a contribution to your future may help. Whether you are healthy and alive beyond 62 or you become disabled or die early, the contributions help you and/or your survivors financially. While you can’t survive on Social Security income alone, every dollar helps and that’s exactly what FICA does - it helps you have a financially secure future.