FICA, or the "Federal Insurance Contributions Act," is a 1935 law established in the United States that finances Medicare programs and Social Security through a payroll tax on employees' salaries.
As per theInternal Revenue Service (IRS), the two taxes comprise disability insurance, survivors, old-age, and hospital insurance taxes into one FICA tax. However, the tax rates are different for each of them but are calculated from the employee's paycheck.
FICA is a mandatory tax by the government, which an organization must withhold from an employee’s or employer’s paycheck. The U.S. government can impose penalties for failing to mandate FICA.
Does Everyone have to Pay FICA?
FICA is mandatory for every wage earner. It primarily depends on a person’s salary, profession, and the U.S. residency requirements.
How is One Exempted from FICA?
A person can be considered exempted only if they fall under the following criteria:
A self-employed worker making less than $400 a month
College or university students holding on-campus work
Anyone with a salary over $132,900
Individuals from another country other than the U.S. working in a foreign government organization
People belonging to recognized religious groups are against receiving Social Security payments.
Employees of state and local governments who: have worked for the same employer since March 31, 1986, are not protected by theSection 218 Agreement and are a member of a general retirement strategy.
Employees of state or local government employed before 1984
Non-immigrant students, teachers, researchers, and scholars
How Much is Taken Out of An Employee’s Paycheck for FICA Taxes?
It is essential to keep track of the tax percentage and so here is a breakdown of the FICA tax percentage in 2022:
Anemployer will deduct a 6.2 percent tax on $147,000 income for Social Security Tax. However, a paycheck above $147,000 will not be taxed for SS purposes.
For Medicare programs, a 1.45% tax is deducted from employers earning $200,000. The percentage will rise by 0.9% for a higher-earning employee.
Is it Illegal for an Employer to Not Withhold Federal and Employment Taxes?
According to Federal Law and the IRS, every employer must complete an “Employer’s Quarterly Federal Tax Return” form (941-Form) to notify the government about an employee's payroll taxes. An employer must also pay the due taxes to an approved financial organization or bank. Failure to comply with the tax laws can result in criminal charges and a nationwide boycott.
How Similar are Payroll Tax and FICA Tax?
Payroll tax and FICA tax are the same things. The terms are interchangeably used and showcase the same meaning: an employer remits the employee's paycheck tax to the IRS.
However, the FICA tax only includes Medicare and Social Security, and the Payroll tax is the total FICA tax plus the federal, state, and local wage taxes.
Are FICA Tax and Social Security Tax the Same?
Some may confuse FICA Tax with Social Security Tax, but they differ. The United States government passed the FICA tax in 1935 to mandate and fund the Social Security tax. So, FICA is linked to contributing to Social Security for future financial benefits.
How Much Do FICA Taxes Impact an Employee’s Retirement?
A person can calculate their Social Security retirement benefits using asimple calculator provided by Social Security. The money a person will get each month through their Social Security Benefits is the average of their highest wage earned over 35 years.
However, a person’s FICA Tax benefits depend on several things.
Spouse’s income or earnings
Spouse’s passing away
Divorce from a spouse
Accurate payment of tax
Loss of employment
You can easily look up many more reasons for detailed answers.
Can an Employee have Control Over their Tax Withholdings?
FICA helps understand your flow of money and where it might be going. However, the government determines the amount taken away from an employee's paycheck. But a person can always control their various tax withholdings through their responses on the W-4 Forms.
An employee's W-4 Form contains information on their marital status, dependents, and household members, which helps determine the withholding amount. One will have less tax taken out from their paycheck with less withholding.
Moreover, an employee’s W-4 Form also helps employers calculate the correct withholding amount of federal and state tax from their income. An employee can also change their W-4 Form any time they want.