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The Federal Insurance Contribution Act: How will it affect ordinary Americans?

FICA symbol. Concept words FICA federal insurance contributions act on white note on beautiful white background. Dollar bills.
FICA symbol. Concept words FICA federal insurance contributions act on white note on beautiful white background. Dollar bills. (Photo via https://www.alamy.com/)

The Federal Insurance Contribution Act: How will it affect ordinary Americans? Tax season has arrived, but the journey ahead need not be difficult. Starting with FICA or The Federal Insurance Contribution Act, we’re explaining the concepts, forms, and due dates you need to be aware of to properly file your taxes in 2023.

 

Federal Insurance Contributions Act (FICA): What It Is, Who Pays

The Federal Insurance Contributions Act (FICA) is a U.S. law enacted in 1935 that mandates a payroll tax on the paychecks of employees, with matching contributions from employers. The money collected is used to fund the Social Security and Medicare programs. (Photo via https://www.investopedia.com/)

 

Concerned or perplexed about the money deducted from your paycheck each week? Are you curious how your taxes for Social Security and Medicare relate to them? The federal tax in the United States is explained here.

A payroll tax is required to be deducted from employees’ paychecks under the Federal Insurance Contributions Act (FICA), a 1935 U.S. statute that also requires employers to make matching amounts. The money earned is used to pay for Medicare and Social Security.

Your total federal tax obligation is 7.65% of your gross income. These percentages are matched by your employer:

To Social Security: 6.2%

1.54% to Medicare

Medicare taxes are increased by 0.9% for people whose earning income exceeds $200,000 ($250,000 for married couples filing jointly).

 

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These taxes deducted from your income are used to fund the Social Security and Medicare systems, which provide retirement, disability, survivors’, and children’s benefits.

The act’s original purpose was to allow working people to contribute a certain amount of each paycheck they received while they were employed to Social Security (and later Medicare) in order to be able to rely on earned financial and health benefits in their later years.

In order to finance Social Security and Medicare, self-employed individuals are required to pay taxes on their net income under the Self-Employment Contributions Act (SECA) of 1954.

The Federal Revenue Service (IRS) states that Federal Insurance Contribution Act (FICA) taxes are made up of the hospital insurance tax and the old-age, survivors, and disability insurance taxes (Social Security) (Medicare). Every one uses a different pace.

Social Security taxes on wages have a maximum wage base above which no tax is applied. For 2022 and 2023, the pay base is set at $147,000 and $160,200, respectively.

Medicare taxes have no maximum wage base.

Employer and employee contributions to Social Security are split into two categories for 2022 and 2023, totaling 12.4%. Employer and employee each contribute 6.2% of the total.

 

Business concept about Federal Insurance Contributions Act FICA with inscription on the page.

The Federal Insurance Contributions Act (FICA) is a U.S. law establishing payroll taxes to fund the Social Security and Medicare programs. Taxes under the Federal Insurance Contributions Act (FICA) are composed of the old-age, survivors, and disability insurance taxes, also known as social security taxes, and the hospital insurance tax, also known as Medicare taxes. Different rates apply for these taxes The taxes are calculated as a percentage of the employee’s subject wages. FICA mandates employers to withhold the correct dollar amount from every paycheck and forward it to the government. Failure to comply can result in significant penalties. (Photo via https://www.dreamstime.com/)

 

Both the employee and the employer are responsible for paying the 2.9% total Medicare tax rate. Employer and employee each contribute 1.45%.

Workers who earn more over a certain threshold amount must pay an additional 0.9% Medicare tax. This sum for individuals in 2022 is $200,000 ($250,000 for married couples filing jointly). So, a worker’s overall Medicare tax could be as high as 2.35% (1.45% plus 0.9%) depending on their income. The increased Medicare tax is not needed to be matched by employers.

The self-employed are responsible for paying both the employer and employee components of Social Security and Medicare taxes under the Self-Employed Contributions Act (SECA). For instance, as a sole entrepreneur, you would be required to contribute 2.9% of your income to Medicare and 12.4% of your income to Social Security.

You would also be responsible for paying an additional 0.9% Medicare tax on self-employment income above the threshold.

 

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While paying more in taxes than employees, self-employed people do receive a tax advantage. The sum that reflects the employer’s portion (half) may be written off as a business expenditure.

Despite the fact that the Supplemental Security Income (SSI) program is administered by the Social Security Administration, the Federal Insurance Contribution Act (FICA) and the Self-Employed Contributions Act (SECA) taxes do not support SSI benefits (SSA). Benefits for SSI are paid out of regular tax collections.

Consider FICA in this way…

You cannot utilize the tax money you pay to receive advantages from a personal account. Benefits for existing retirees and other beneficiaries are funded in part by today’s workforce. Any extra money is sent to the Social Security trust funds to help protect you, your family, and tomorrow.

FICA Tax in 2022-2023: What Small Businesses Need to Know

Money collected from the FICA tax is used to fund Social Security and Medicare. FICA taxes were established by the federal insurance contributions act. According to the federal insurance contributions act, earnings from workers are taxes to fund the coffers for social security and Medicare. (Photo via https://smallbiztrends.com/)

 

The Federal Insurance Contribution Act (FICA) taxes are not applied to some wages. For instance, according to the Federal Revenue Agency, the Federal Insurance Contribution Act (FICA) taxes do not apply to services rendered by students who are employed. If an organization’s primary purpose and the relationship between the employee and the student are educational, it is referred to as a “school, college, or university”.

Non-residents are typically responsible for paying Social Security and Medicare taxes, according to the IRS. Federal Insurance Contribution Act (FICA) taxes are not applied to the following categories of people:

Workers with A-visas: Those who are compensated in their official position as representatives of foreign governments.

Crew members of a ship or aircraft with a D-visa are those whose employer or vessel is foreign or whose services are rendered outside of the United States.

Employees who perform services in the United States that are permitted by United States Citizenship and Immigration Services, such as on-campus student employment, specific off-campus student employment, on-campus employment, or practical training student employment, are known as F-visa, J-visa, M-visa, or Q-visa holders.

G-visa holders: Personnel working for international organizations who are compensated for their services.

H-visas: Non-immigrant Filipino citizens who provide services in Guam or non-immigrants engaged in temporary agricultural work

Additional pay that is not subject to Social Security and Medicare taxes includes:

Church pastors who have been duly ordained, commissioned, or licensed

Young people under 18 working for their parents

if compensated under specific conditions, student nurses.

 

Do I receive my Federal Insurance Contributions Act (FICA) tax refund?

If your Social Security taxes were unintentionally deducted from exempt wages, you are entitled to a refund. Your employer ought to provide you a complete refund; if not, you can submit a claim to the IRS.

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