How is FICA calculated? It's smart to understand this tax if you are a wage earner in the United States. "FICA," an acronym for the "Federal Insurance Contributions Act," is a withholding from your paycheck that goes to federal government programs. Learning exactly what FICA is and how it is calculated will help you calculate the tax on your own and make sure that you are not overpaying.
Where does the money go?
FICA is a tax put in place to support Social Security and Medicare. The social security program provides social welfare for those with disabilities or who reach age 65. Medicare is a health insurance administered by the federal government to those over age 65 or those with disabilities. Both of these taxes are considered FICA and are taken out of an employee's paycheck.
Social Security: The Social Security percentage of the gross pay is 6.2 percent. This is after any pre-tax amounts, such as contributions to a retirement fund. The employer must withhold a flat 6.2 percent of the earnings for the pay period. For example, if the employee's gross earnings for a pay period were $500, the amount withheld for Social Security would be $31.
The federal government has placed a cap on the amount of Social Security FICA tax that an employee can pay. As of 2009, an employee is only responsible for contributing FICA on the first $106,800 of taxable income in a calendar year. Once the wage earner passes that threshold, the employer should no longer have to pay out Social Security.
Medicare: For Medicare, the flat percentage is 1.45 percent of taxable income. It is applied to the gross income after any pre-tax deductions have been applied. Therefore, if an employee made $500 per pay period, the withholdings for Medicare would be $7.25. Unlike the Social Security portion of the FICA, there is no cap on the income level, and an employee will pay toward Medicare regardless of how much he earns in a calendar year.
When an employee pays out the combined 7.65 percent in FICA, the employer is responsible for matching that. In other words, the government receives 15.3 percent of an employee's gross income. When someone is self-employed, that worker is responsible for paying the government the full 15.3 percent. However, the self-employed worker must pay that 15.3 percent on around 92 percent of their income to keep withholdings more equal to employees whose employers match FICA.
Who is exempt from backup withholding? Most taxpayers are, as long as they keep reporting their tax information accurately.
Wondering how does salary work? New salaried employees should check with their companies about specifics because there are pros and cons to salaried positions.