FICA | Meaning and Definition

What is FICA?

The Federal Insurance Contributions Act (FICA) is a compensation tax in the United States that is collected from workers’ salaries to help finance Social Security and Medicare, two federal programmes that give payments to retired people, disabled people, and kids of passed away employees. These taxes are paid by both employees and employers.

FICA obligations are required, and the rate is determined yearly, albeit not always—for example, for 2020 and 2022, it stayed unchanged. The FICA payout value is set by the employee’s earnings: the higher the earnings, the larger the FICA payment.

Moreover, there is a maximum income limit for Social Security payments, after which zero extra funds are collected. Social Security taxes are withheld by the federal government according to the yearly salary range, which was fixed at $142,800 in 2021 & $147,000 in 2022.

For 2021 and 2022, the Social Security tax rate is 6.2 percent, and the Medicare tax rate is 1.45 percent. Employers must pay taxes equivalent to the sum deducted from employee salaries.

While the Medicare contribution has no upper threshold, employees must compensate an extra 0.9 percent tax on wages over $200,000 for singles ($250,000 for married people joint filers). The Additional Medicare Tax is 2.35 percent cumulative (1.45 percent plus 0.9 percent ). The heightened Medicare tax is not accountable to be adjusted by employers.