Fica Tax – A comprehensive guide on withholding tax

• The Federal Insurance Contributions Act (FICA) is a type of “withholding tax”.
• Withholding taxes are those taxes that are withheld (or deducted) by the employer.
• This tax is levied on employees and self-employed people.

“Who’s FICA? Why’s he getting all my money?” – Rachel Greene (Jennifer Aniston), ‘Friends’. 

If this line from the tv show ‘Friends’ rings a bell, and you still don’t know “who” FICA is, read on:

What is FICA?

The Federal Insurance Contributions Act (FICA) is a type of “withholding tax” that your employer deducts and sends to the state tax authority/IRS before sending you your paycheck. It’s called a withholding tax because it’s withheld from your pay in advance.

How much is the FICA tax?

Currently, the major portion of the FICA tax is 6.2% towards Social Security and 1.45% towards Medicare.

In 2020, the Social Security portion was only applicable up to $137,700 of your annual earnings.

In 2021, this Social Security portion is applicable up to $142,800,

For single tax filers, the Medicare tax portion of 0.9% will be applicable on earnings over $200,000 and $250,000 for those filing taxes jointly.

Why should l pay FICA tax? 

The IRS works on a tax-deducted at source model, so you pay the tax as soon as you earn the money – and it is taken from the paycheck before it reaches you – so that there’s less potential fraud or tax evasion in the system. 

Why has FICA been deducted from my paycheck?

While you can opt not to have federal income tax withheld from your paycheck, the primary components of FICA (Social Security and Medicare) will still be deducted at source from your paycheck. Those that opt not to have federal income taxes withheld are called “Exempt Workers”.

You can be an Exempt Worker – exempted from withholding tax if you had no tax liability in the last year and had all your federal income tax refunded – and if you expect the same situation to be true this year as well.

In any case, when you file your tax return, the primary goal is to calculate your total income tax liability and total taxable income – and see if you’ve already crossed that liability amount by paying taxes in advance (i.e. withholding taxes). If you’ve paid more as withholding taxes than you actually owe (after due consideration of your dependants, deductions, etc.) you can apply for a refund.

You can increase or decrease your withholding taxes by filling out your W-4 Form in a way that works for you.

What are withholding taxes?

As seen above, withholding taxes are those taxes that are withheld (or deducted) by the employer – from the employee’s paycheck – and remitted to the IRS or state tax body on behalf of the employee. 

Types of withholding taxes:

There are quite a few more withholding taxes you may hear about while filing your taxes, these are the important withholding taxes for employees and employers:

1. FICA: This tax is levied on employees and self-employed people, FICA consists of:

   • Social Security Tax: Also called the OASDI – this is the primary chunk of what constitutes your FICA – as mentioned above, it’s 6.2% taken from the employee and 6.2% taken from the employer. If you’re self-employed, you pay the entire 12.4% (6.2% + 6.2%) yourself
   • Medicare Tax: Also called the Hospital Insurance Tax – this is the remainder of your FICA – it’s 1.45% taken from the employee and 1.45% taken from the employer. However, if you earn over $200,000 (single filer) or $250,000 (joint filer), an additional 0.9% is withheld. If you are self-employed, you pay the entire 2.9% (1.45% + 1.45%) yourself. 

2. Federal Income Tax: This tax is also levied on employees and self-employed people. This amount is withheld from your paycheck as well, and the amount that is withheld depends upon your annual taxable income + variable factors filled out in the W-4 Form. This amount is sent to the IRS by the employer directly, on behalf of the employee.
3. State Taxes: This tax is also levied on employees and self-employed individuals. State Tax is another tax amount that is withheld from your paycheck, and the amount that is withheld depends upon your annual taxable income + location of work + location of income + location of residence + variable factors filled out in the W-4 Form. This amount is sent to the state taxation authority by the employer directly, on behalf of the employee.
4. Wage taxes, Local income taxes: The amount of tax withheld under this heading depends largely upon the city/local county in which you earn/generate income. Different counties and city authorities have different rates at which they charge this tax to pay for local infrastructure and facilities. This tax is levied on employees or self-employed individuals. 
5. Self-Employment Tax: This is paid by the entrepreneur that works for him/herself. Since this person is the employer and the employee, he/she is responsible to pay both sides of the contribution when it comes to Social Security Tax and the taxes for Medicare. Therefore, self-employed people are liable to pay the full 12.4% Social Security Tax and 2.9% Medicare Tax on their net earnings.
6. FUTA Tax: This is a tax that’s paid by employers to the IRS. It’s called the Federal Unemployment Tax Act, and its purpose is to fund the unemployment program that helps people who’ve lost their jobs.
7. SUTA Tax: This is a tax that’s very similar in nature, collection, and intent as the FUTA Tax. The primary difference here is that employers pay the tax to the state in which they operate, rather than to the IRS.