Highlights of the Federal Income Contributions Act Tax
Signed into law in 1935, the Federal Insurance Contributions Act Tax (FICA) outlines the taxes withheld from your paychecks to fund Social Security and Medicare.
Let's take a look at how it impacts you:
What is FICA?
FICA is designed to support retirees who qualify for benefits.The funds deducted from your paychecks are used to provide a retirement savings and insurance program for working Americans. As you work and earn, and pay your FICA taxes, you earn credits for social security benefits. Paying FICA taxes also qualifies you for disability and life insurance benefits. If you become disabled, you may be eligible for Social Security disability benefits if you meet certain criteria and satisfy the minimum number of Social Security credits for your age. If you die, Social Security survivor benefits may also be available for your eligible family members, such as minor children and a surviving spouse who cares for young children or is age 60 or older.
What does FICA mean in 2021?
To earn a Social Security credit in 2021, you'll need to earn at least $1,470 and pay FICA taxes on that amount. Every year, you can receive up to four credits. Once you have earned at least 40 credits, you will be eligible to receive Social Security retirement benefits beginning at age 62. Both employees and employers pay FICA taxes at the same rate. FICA taxes are divided into two parts: Social Security tax and Medicare tax. The Social Security tax rate is 6.2% of wages for 2021, and the Medicare tax rate is 1.45% of wages. Together, these make up a tax rate of 7.65% for FICA taxes. If you're self-employed, you'll need to pay for both the employee's and the employer's portion of FICA taxes, which is 15.3% of earnings.
Are there limits to the FICA Tax?
The Social Security wage base is set at $142,800 in 2021. This means that you'll pay the Social Security tax on 6.2% on your earnings up to $142,800. Your wages above that limit will not be taxed for Social Security. Medicare tax does not have an earnings limit, so you'll be expected to pay the 1.45% tax on all your earnings. If you file taxes as a single person and earn more than $200,000 a year, you have to pay an additional Medicare tax. This tax is calculated at 0.9% of your wages above the $200,000 mark. If you are married and file jointly, that additional tax will apply to earnings above $250,000. While the FICA tax is paid by most workers, the tax doesn't apply to all paychecks. Payments that are not subject to FICA taxes include:
Children under age 18 who are employed by their parents.
Qualified retirement plan contributions from employers.
Service performed by students employed by a school, college or university.
Some church and qualified church-controlled organization wages.
Some state and local government salaries.
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