What is FICA Tax

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Most employees in the United States ask “What is FICA tax?” when reviewing paycheck deductions. Taxes taken out for Social Security and Medicare make up most of the Federal Insurance Contributions Act (FICA).

Most employer businesses, self-employed persons, and employees are required to pay FICA tax. The Internal Revenue Service (IRA) administrates both Medicare and Social Security taxes.

FICA Tax Exemption

A small percentage of Americans aren’t required to pay FICA tax. These individuals include:

  • Employee-students who study and work part-time at the same university, school, or college they attend. Qualifying conditions must be satisfied. The employer institution must offer an approved curriculum, staff, and students who attend it. If an employee-student works 40 plus hours in a school break, he or she is still exempt from FICA as long as the break doesn’t extend more than five weeks.
  • Religious organizations are exempt from FICA tax is they’re qualified under IRS Code 501(c)3. It’s necessary for religious organizations or members of tax-exempt religious sects to apply for this tax-exempt status with IRS.
  • Nonresident aliens may be exempt from FICA tax. Most nonresident aliens are required to pay Social Security taxes on earnings when these earnings were received from employment or services they rendered in the United States. Certain nonimmigrants aren’t required to pay FICA tax, including holders of A, D, F, G, H, J, M, and Q visas. For instance, foreign students or educational workers who are in the country on a temporary basis or those performing services for a foreign country while in the U.S. may be exempt from FICA tax

FICA or OASDI Taxes

FICA tax (also labeled OASDI, or Old Age, Survivors, and Disability Insurance tax) is deducted from most employee paychecks in the United States. FICA is a direct tax deduction against payroll earnings that’s used to fund Social Security retirement benefits and other programs.

FICA Tax Rate

Regardless of your paycheck amount, you’ll see that FICA tax is withheld at one rate. Unlike other variable tax rates, the number of exemptions and/or allowances you claim won’t affect your FICA tax rate of 7.65 percent this year.

  • The Social Security portion of FICA is 6.2 percent of earnings, up to a maximum earnings amount of USD 118,500 in 2016.
  • If you earn more than USD 118,500 per year, your employer’s payroll should stop withholding FICA taxes.
  • Medicare tax is also part of FICA. The current Medicare tax rate is currently 1.45 percent on your first USD 200,000 of earnings. The amount rises to 2.35 percent for earnings above this level.

Employee deductions and employer contributions comprise the bulk of FICA taxes collected each year in the U.S.

Employer FICA Contribution

U.S. employers must also pay FICA taxes at the same 7.65 percent tax rate as their employees in 2016:

  • Employers’ Social Security tax rate is 6.2 percent, with a USD 118,500 wage-base limit.
  • Employers’ Medicare tax rate is 1.45 percent.
  • This rate is unchanged from tax year 2015.

Most employers essentially consider FICA tax as a payroll cost. It’s never placed in a payor account, unlike employee retirement plan deductions from your payroll check.

FICA and Social Security Retirement Benefits

FICA taxes fund Social Security retirement benefits. If you’ve contributed FICA taxes to the Social Security system over the years, you may request monthly retirement benefits before, at, or after your Social Security Full Retirement Age, or FRA.

If you work for more than one employer during the tax year and you earned more than the FICA maximum, the employer might continue to withhold FICA tax at the yearly tax rate:

  • Tell your employer’s payroll department if you’ve already paid in enough FICA for the tax year, or
  • Request an overpayment credit on your federal tax return for the year.

IRS reports that some employers withhold more FICA taxes than required. You can check FICA credits on your Social Security “My Account” page any time.