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In the US, FICA deductions refer to those taxes deducted, or subtracted, from employee paychecks to collectively fund the Social Security and Medicare programs. Social Security pays retirement income to elderly Americans based upon their lifetime earnings, disability income to individuals permanently injured or incapable of work due to chronic illness, and income to children orphaned by the death of one or both parents. Known first as Section XIII, the program was renamed the Federal Insurance Contributions Act (FICA) and has continued with various required percentages collected since 1939. FICA deductions are based on an employee's original gross income; the employee's share is subtracted before any other deductions and the total amount of approximately 15 percent of gross earnings is paid equally by the employee and his employer. An employee's FICA deductions, then, are 7.5 percent of his gross income and consist of a larger deduction for the Social Security program and a smaller contribution for the Medicare program.
The Social Security tax subtracted from an employee's paycheck is the larger of the FICA deductions by far. The exact amount is established by legislation on an annual basis and thus changes from year to year. Over the past decade, legislation has required about 7.5 percent of the employee's gross wages. During some periods of economic hardship in the past, however, the amount of an employee's contribution has been temporarily decreased as an economy-boosting measure. The Social Security tax as one of the FICA deductions is capped at a maximum contribution, the amount of which can change from year to year.
The second and smaller of the FICA deductions includes an amount earmarked for Medicare. The amount of this tax is also set by Congressional legislation and thus fluctuates over time. Its approximate amount, however, hovers somewhere around 1.5 percent of an employee's gross wages. This tax pays for current Medicare — or medical costs and health insurance benefits — for retirees and the disabled. Unlike the Social Security tax, there is no maximum cap applied to this FICA deduction.
As indicated earlier, FICA deductions cover the cost of Medicare and Social Security retirement, disability and survivor benefits. For the majority of Americans who are employed by companies and businesses, FICA deductions are the first subtractions from their paychecks, usually followed by deductions for state and local taxes for applicable areas. In addition, the pay an employee receives may also be lowered voluntary deductions for health insurance premiums, retirement plans and other plans with optional participation. Although FICA deductions may not be popular among employees, they are only responsible for paying half of the tax owed, while their employers pay the remainder. Those who are self-employed or are independent contractors, on the other hand, are responsible for paying the full amount to FICA.
The rates are specifically set. Both the employee and the employer pays a share, which has not always been an equal share, nor are the amounts fixed year from year.
Additionally, The Social Security Component has had a wage limit, and earnings above this are no longer taxed. In 2013, an additional Medicare tax went into effect for high wage earners (no portion of this tax is paid by the employer as of this writing). Always confirm the tax rates and wage limits for the year in question.
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