Glossary of Human Resources Management and Employee Benefit Terms
FICA, or Federal Insurance Contributions Act, is a U.S. payroll tax that is deducted from employees’ paychecks to fund Social Security and Medicare—two federal programs that provide benefits to retirees, people with disabilities, and children of deceased workers. Both employees and employers pay these taxes equally.
According to ADP, the FICA deduction rates are as follows in 2020:
Social Security: 6.2 percent of employees’ gross wages
Medicare: 1.45 percent of employees’ gross wages
The maximum Social Security tax employees and employers will each pay in 2020 is $8,537.40. There is no limit with Medicare tax.
With Social Security, the 6.2 percent tax applies to earnings up to $132,900. Employees are not required to pay the Social Security tax on any income earned above this amount.
Medicare tax, however, isn’t subject to a salary limit. All workers are required to pay their share of Medicare regardless of the amount of money they make.
Not everyone is required to pay a FICA tax. This depends on an individual’s salary, occupation, and conditions of U.S. residence.
Those who are exempted from paying all or a portion of the FICA tax are:
Individuals who make above $132,900.
State and local government employees hired before 1984.
State and local government employees who have been with the same employer since March 31, 1986, not covered under Section 218 Agreement, and are part of a public retirement system.
Members of certain religious groups that are a recognized religious sect opposed to Social Security benefits.
College students who have an on-campus job.
Most foreign students, scholars, teachers, and researchers if they are non-immigrant and non-resident aliens.
Foreign citizens who work in the U.S. for a foreign government.
Self-employed individuals who make less than $400.
FICA is not federal income tax. Though both are employment taxes that are deducted from employees’ paychecks, they are two separate components that are calculated differently. While FICA taxes only apply to earned income (salaries, wages, and bonuses), federal income tax applies to all income, regardless of how your employees earned it. Therefore, in addition to their employment income, it applies to their dividends, interests, short-term capital gains, annuities, and pensions.
FICA tax is not the same as Social Security, but they are connected—FICA taxes fund Social Security.
Employers that fail to withhold employment and federal income taxes may become subject to criminal and civil sanctions. They are required by law to report income and employment taxes withheld from employees to the IRS through an Employer’s Quarterly Federal Tax Return (Form 941). These taxes should be deposited in full to an authorized bank or financial institution.
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