FICA stands for “Federal Insurance Contributions Act”. FICA taxes are payroll taxes originally part of the Social Security program but made part of the Internal Revenue Code in 1939. This is the tax that pays for Social Security Disability, Social Security retirement and Medicare benefits. Therefore, to be eligible for Social Security Disability benefits you are required to have contributed to the Social Security fund and paid a minimum amount of FICA taxes, which varies by age.
Both employees and employers pay FICA funding Social Security Disability and retirement benefits through payroll deductions on income up to $118,500 per year in 2016. Earnings in excess of this amount are free from the FICA tax. In 2016, the maximum FICA contribution is $7,347.00. Employers pay half the FICA Social Security tax (6.2% of wages) and employees pay the other half (6.2% of wages), or a total of 13% of an employee’s wages up to the $106,800 limit.
FICA also funds Medicare with a separate 1.45% tax which is also deducted from payrolls. Like the Social Security tax, both employers and employees are required to pay this tax. Employers pay half the FICA Medicare tax (1.45% of wages) and employees pay the other half (1.45% of wages), or a total of 2.9% of an employee’s wages. Unlike Social Security taxes, however, there is no cap on income that is taxed for purposes of Medicare. All wages, regardless of their amount, are subject to FICA Medicare tax.
While the tax seems straightforward enough on its face, it requires employers to make periodic deposits with the IRS and to fill out quite a lot of paperwork, such as the
- Annual federal unemployment tax return (Form 940 or 940EZ)
- Employer's quarterly payroll tax return (Form 941)
- Annual Return of Withheld Federal Income Tax (Form 945) and
- Wage and Tax Statements (Form W-2)
In addition, employers must also meet state and local reporting requirements.
There is an exception to FICA for students who are employed by the school where they are enrolled in a course of study.
Since both Social Security Disability Insurance and regular retirement benefits, depend on the FICA tax, there has been much discussion about raising the FICA ceiling on wages.