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What is the FICA tax Explained.

If you are an employee on a U.S. payroll, one of the taxes you will see subtracted from your gross pay will be the FICA tax, which is a combination of Social Security and Medicare taxes.

Learn what FICA is, why you have to pay it, and the differences between FICA and income taxes.

What is the FICA tax?

The FICA tax (Federal Insurance Contributions Law), also commonly called payroll tax or withholding at source, is money that is charged to you and your employer to pay for services such as old-age, survivors and disability insurance (OASDI) . It also covers Medicare.

  • Alternative name : withholding or payroll tax
  • Acronym : FICA

As an employee, your total amount of FICA taxes due for 2020 is 6.2% of your gross pay for Social Security and 1.45% of your gross pay for Medicare, for a total of 7.65%.

While Social Security taxes are capped based on your earnings ($ 137,700 for 2020), Medicare tax actually increases by 0.9% if you earn more than a certain amount in a calendar year.For single taxpayers, that threshold is $ 200,000; For those who are married filing jointly, the threshold is $ 250,000.

Your employer will automatically withhold these taxes for you. It will also match your contributions to the FICA tax, resulting in a total of 15.3% of the FICA tax paid per employee each year.

Although independent contractors are not subject to the FICA tax, they are subject to the self-employment tax, which is similar to the FICA tax in that it covers Social Security and Medicare taxes. The total tax owed by independent contractors is 15.3% total each year.

The total amount of taxes owed for all workers is 15.3% of gross earnings for 2020, although most people will only see 7.65% of that deducted from their checks because their employer pays the rest.

How does the FICA tax work?

Driven by the suffering of the Great Depression, the FICA tax was originally created to fund an “old age” Social Security system. Signed into law by Franklin Roosevelt in 1935, his intention was to create a self-financing program rather than one dependent on federal revenue. When Medicare was created in 1965, this was added to the tax as well.

Do you have to pay FICA taxes?

As an employee in the US, you are most likely subject to FICA tax. While there are some exemptions, such as certain religious figures or groups, most employees must pay into the system.

FICA is a non-elective tax that is automatically withheld from your paycheck throughout the year, so you never have to worry about it when tax returns are due.

FICA tax vs. income tax

Understanding the different types of taxes can be confusing, especially since the United States has so many different types. So what is the difference between FICA and income tax, and how does it affect you?

Bottom line: almost everyone pays the FICA tax; Whether you owe income taxes, meanwhile, varies, depending on income.

FICA taxIncome tax (federal or state)Tax to fund Social Security and Medicare programsIt is used to generate general revenue for the federal (or state) budget.Social Security tax is capped based on how much you earn; Medicare tax is notTax brackets determine the amount of taxes you owe each yearAutomatically withheld from your paycheckYou can choose to increase or decrease your exemptions, but you may have to pay taxes or penalties on your annual tax return.

Pros and cons of FICA taxes


  • Mandatory tax
  • No limit to taxable earnings

Pros Explained:

  • Funding Services You Will Probably Need One Day : Almost everyone will have to depend on Social Security services one day, whether they are disabled or simply elderly. You are paying into a fund whose profits you will use later.
  • Worry-free tax automatically collected from your paycheck : Unlike federal or state taxes, FICA tax is automatically withheld from your paycheck , so you never have to worry about it.

Disadvantages explained

  • Mandatory Tax : With very rare exceptions, this tax is mandatory for US employees, whether they use your services or not.
  • No Limit on Taxed Earnings : While the Social Security portion of FICA taxes is capped each year, the Medicare portion does not. There is also an additional 0.9% Medicare tax for wages over $ 200,000 as a single taxpayer.

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