Fica Taxes Overview
The term “FICA” is an acronym for the Federal Insurance Contributions ACT.
The purpose behind the FICA taxes is to raise money to pay for the two biggest social programs in the United States – Social Security and Medicare. Together, these taxes account for about 15 percent of earned income. Fortunately for regular wage earners, most employers are required to pay half of the FICA taxes. In these cases, the employee share of the tax is withheld from his or her pay.
The first component of FICA taxes is the Social Security tax.
This tax is a flat tax of 6.2 percent of all wages up to $106,800 (for 2010. This amound is occasionally adjusted for inflation by increments of $500). Wages above this amount are not subject to the Social Security tax. Moreover, the 6.2% tax is matched by most employers, for a total of 12.4% of total wages collected by the federal government.
The second component of the FICA taxes is the Medicare tax.
Currently, the Medicare tax is equeal to 2.9 percent. Like the Social Security tax, the incidence of the Medicare tax is also split between regular employees and their employers. Individually, each respective party is responsible for paying 1.45% of total wages earned. In the same manner as the Social Security tax, the Medicare tax is also withheld from employee pay. In contrast to the Social Security tax, however, there is no cap on income which is subject to the Medicare tax. Whereas the Social Security tax can be seen as a regressive tax, the Medicare tax is strictly a flat tax – that is to say, the Medicare tax rate does not diminish as income increases.
Employers are only required to pay FICA taxes for regular, wage-earning employees. Employers are not required to pay FICA taxes for independent contractors, which partly explains the popularity of corporate outsourcing in recent years. Individuals who are self employed – including independent contractors – are required to pay self-employment tax, which is roughly equal to the entire share of FICA taxes.
In this article, we have explored some of the components (Social Security tax, Medicare tax) in the FICA Taxes Overview