You may have heard of the Federal Insurance Contributions Act (FICA), but do you truly understand what it is about? This US law is intended to collect payroll taxes and fund programs such as Social Security and Medicare. That sounds technical, but don’t worry; I’ll explain it calmly.
FICA is essentially what enables millions of people to receive benefits such as retirement or disability insurance.
How does this work? Employers deduct a percentage of your salary and apply it to these benefits. If you’re self-employed, the situation is slightly different: you’re responsible for 100% of the tax, but you can deduct half of it when you file your taxes.
What it is and how it influences your Social Security contribution
Assume you work for a company. Every time you receive a paycheck, 7.65% of your salary is withheld. If you work for yourself, that percentage rises to 15.3% because you also pay the employer’s portion. It may sound difficult, but you can deduct half of the amount later.
Where does the money go? To programs like Social Security, which assists over 72 million people in retirement, and Medicare, which covers medical expenses for another 61 million.
Does this sound like a lot? It is. These programs are expensive to maintain: in 2023 alone, Social Security collected more than $1.35 trillion.
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Let’s use a simple example
Let’s assume you make $2,000 per month. According to current rates, a 15.3% tax would be levied, equaling $306. However, because it is a shared responsibility, you would pay half ($153) and your employer would cover the other half. Social Security would receive $248 of the $306, while Medicare would receive $58.
If you are self-employed, you must pay the full $306, but remember that you can deduct $153 from your annual taxes.
Limits and details you should keep in mind
FICA consists of two main components: the Social Security tax (6.2%) and the Medicare tax (1.45%). However, not all of your earnings are subject to these taxes.
For example, in 2024, the Social Security income limit is $168,600. Any earnings in excess of this amount are not subject to Social Security taxation.
Medicare, on the other hand, has no salary limit; however, if you earn a high income, you must pay an additional 0.9% tax. This applies to:
- Single individuals earning more than $200,000.
- Married couples filing jointly and earning more than $250,000.
- Married couples filing separately and earning more than $125,000 each.
In these cases, the total Medicare rate would be 2.35%.
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