What is the Federal Insurance Contributions Act?

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  • Written By: Christopher John
  • Edited By: Angela B.
  • Last Modified Date: 25 May 2020
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The Federal Insurance Contributions Act (FICA) is a U.S. tax law that pays for Social Security and Medicare programs. Social Security pays retirement benefits and survivor benefits, and provides benefits to disabled people. Medicare pays medical expenses for hospital care. This tax applies to employers, employees, and people who are self-employed. The Federal Insurance Contributions Act requires employers to collect this tax by making payroll deductions from an employee’s paycheck.

FICA collects a percentage of earned income from employees and employers. For example, if the Federal Insurance Contributions Act sets a 15.3 percent tax for the year, then an employee is required to pay one-half of that percentage and an employer must pay the remaining half for each employee. This means an employer is required to deduct 7.65 percent from an employee’s paycheck for the Federal Insurance Contributions Act, and the employer must pay the remaining 7.65 percent. If a person is self-employed, then he or she must pay the entire 15.3 percent. A self-employed person may then claim a business deduction of one-half of the total percentage he or she paid under the Federal Insurance Contributions Act.

A cap is placed on the amount an employee must pay for Social Security under the Federal Insurance Contributions Act. This cap, however, does not apply to the Medicare portion of the tax. For example, the Federal Insurance Contributions Act established $6,621.60 US Dollars (USD) as the maximum amount for Social Security for 2010.

This means an employee must continue paying the FICA tax until the employee pays that amount for the particular year. Once an employee reaches the amount set under Federal Insurance Contributions Act for a particular year, then an employee has satisfied the obligation. An employee who pays more than the amount set by FICA may file a request seeking a refund of the amount he or she overpaid.

Generally, a student is not required to pay the tax imposed by the Federal Insurance Contributions Act as long as the student works for a school, university, or college and regularly attends courses at the institution. The Internal Revenue Service (IRS) established regulations concerning student exemption from the FICA tax. These regulations do not allow a full-time employee of a school, college, or university to qualify for the student exemption, even if the employee regularly attends the institution as a student. Further, to qualify as a school, university, or college the institution must provide an education as its primary purpose. This eliminates organizations such as hospitals and museums that may employ students and provide educational opportunities at the same time.

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