FICA Tax

FICA, or the Federal Insurance Contributions Act, is the tax that pays for Social Security and Medicare. It's automatically deducted from employee paychecks and matched by employers. So, how does FICA work?

FICA, or the Federal Insurance Contributions Act, is a mandatory payroll tax covering Social Security and Medicare costs. This tax was introduced in 1935, and it is a percentage of the wages that employees receive from their employers. Employers must withhold the employee portion of FICA from each paycheck and contribute the employer portion to the IRS. They then report the amounts they owe on Form 941, a quarterly employment tax return.

The employer portion is 7.65% of an employee’s taxable earnings. 6.2 percent of this covers Social Security, and 1.45% goes to Medicare. The IRS increases the FICA tax rate each year to reflect the national average wage and consumer price index (CPI). This is called a cost-of-living adjustment. Those who earn more than $200,000 in the year are subject to an additional 0.9% Medicare surtax, which isn’t split between the employer and the employee.

  • For example, if you earn $250,000 in a single year and are married, you’ll pay the full 7.65% FICA rate for the whole year plus a separate 0.9 percent Medicare surtax for the couple
Exceptions FICA
FICA Tax 1

Exceptions

You can earn an exemption from FICA taxes by filing IRS Form 4029, which allows you to waive your rights to receive benefits from either program. Exemptions also apply to certain groups, including foreign government employees, teachers, and some church workers.

  1. Self-employed individuals who earn below a certain threshold: If you are self-employed and your net earnings from self-employment are below $400 in a year, you are not required to pay FICA taxes.
  2. Students: Full-time students who work part-time for their schools, such as work-study programs, may be exempt from FICA taxes. Additionally, students enrolled in a cooperative education program can be exempt from FICA taxes on income earned while participating. If you are on an F-1 or J-1 visa and are working in the United States. In this case, you must sign a FICA exemption form.
  3. Religious organization employees: Employees of certain religious organizations may be exempt from FICA taxes if they meet certain criteria.
  4. Nonresident aliens: Nonresident aliens who are in the U.S. for a limited time and are not considered U.S. residents for tax purposes may be exempt from FICA taxes on certain income.
  5. Certain government employees: Some government employees, such as those who work for a state or local government and are covered by a retirement system, may not be required to pay FICA taxes.
  6. You can find more information about many other exemptions in Publication 15 and Publication 51.

It’s important to note that even if you are exempt from paying FICA taxes, you may still be required to pay other taxes, such as federal income tax. It’s always a good idea to consult a tax professional to understand your tax obligations.

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