FEDERAL INSURANCE CONTRIBUTIONS ACT (FICA) TAX (/ˈfaɪkə/ ) is a
The tax also provides funds to the health care system for
institutions that provide healthcare for workers that do not have
health insurance and cannot afford healthcare treatment. Social
Security benefits include old-age, survivors, and disability insurance
(OASDI); Medicare provides hospital insurance benefits for the
elderly. The amount that one pays in payroll taxes throughout one's
working career is associated indirectly with the social security
benefits annuity that one receives as a retiree. This has caused some
to claim that the payroll tax is not a tax because its collection is
directly tied to benefits that one is entitled to collect later in
In the United States, the term payroll tax usually refers to the FICA tax; income tax refers to other federal and state employment taxes .
* 1 Calculation
* 1.1 Overview * 1.2 Regularly employed people * 1.3 Self-employed people
* 2 Exemptions
* 2.1 Exemption for some full-time students * 2.2 Exemption for employees of some state governments and local governments * 2.3 Exemption for some nonresident aliens * 2.4 Exemption for members of some religious groups * 2.5 Exemption for some aliens on temporary work assignment * 2.6 Exemption for some family employees * 2.7 Exemption for foreign governments and some international organizations * 2.8 Exemption for certain emergency workers * 2.9 Exemption for certain newspaper carriers * 2.10 Exemption for some real estate agents and salespeople
* 3 History * 4 Criticism * 5 See also * 6 References * 7 External links
Share of federal revenue from different tax sources. Individual income taxes (blue), payroll taxes/FICA (green), corporate income taxes (red).
The Center on Budget and Policy Priorities states that three-quarters of taxpayers pay more in payroll taxes than they do in income taxes. The FICA tax is considered a regressive tax on income with no standard deduction or personal exemption deduction. The Social Security portion of the tax is imposed on only the first $113,700 of gross wages in 2013, $117,000 in 2014, and $118,500 in 2015 and 2016. The FICA tax is not imposed on investment income such as rental income, interest, or dividends.
REGULARLY EMPLOYED PEOPLE
Since 2013, the employee's share of the Social Security portion of
the FICA tax has been 6.2% of gross compensation up to a limit that
adjusts with inflation. The taxation limit in 2014 was $117,000 of
gross compensation, resulting in a maximum Social Security tax for
2014 of $7,254. This limit, known as the
Social Security Wage Base
The employer is also liable for 6.2% Social Security and 1.45% Medicare taxes, making the total Social Security tax 12.4% of wages and the total Medicare tax 2.9%. (Self-employed people are responsible for the entire FICA percentage of 15.3% (= 12.4% + 2.9%), since they are in a sense both the employer and the employed; see the section on self-employed people for more details.)
Employee's share of the Social Security portion of the FICA tax
2005 6.2% $90,000 $5,580.00
2006 6.2% $94,200 $5,840.40
2007 6.2% $97,500 $6,045.00
2008 6.2% $102,000 $6,324.00
2009 6.2% $106,800 $6,621.60
2010 6.2% $106,800 $6,621.60
2011 4.2% $106,800 $4,485.60
2012 4.2% $110,100 $4,624.20
2013 6.2% $113,700 $7,049.40
2014 6.2% $117,000 $7,254.00
2015 6.2% $118,500 $7,347.00
2016 6.2% $118,500 $7,347.00
2017 6.2% $127,200 $7,886.40
If a worker starts a new job halfway through the year and during that year has already earned an amount exceeding the Social Security tax wage base limit with the old employer, the new employer is not allowed to stop withholding until the wage base limit has been earned with the new employer (that is, without regard to the wage base limit earned under the old employer). There are some limited cases, such as a successor-predecessor employer transfer, in which the payments that have already been withheld can be counted toward the year-to-date total.
If a worker has overpaid toward Social Security by having more than one job or by having switched jobs during the year, that worker can file a request to have that overpayment counted as a credit for tax paid when he or she files a federal income tax return . If the taxpayer is due a refund , then the FICA tax overpayment is refunded.
The effective payroll tax rate based on private simulations for different income groups. Effective tax rate equals the payroll taxes paid divided by total income. Total income includes traditional measures of income, imputed undistributed corporate profits, nontaxable employee benefits, income of retirees, and nontaxable income. Payroll taxes include employee and employer FICA.
A tax similar to the FICA tax is imposed on the earnings of
self-employed individuals, such as independent contractors and members
of a partnership . This tax is imposed not by the Federal Insurance
Contributions Act but instead by the Self-
These calculations are made on Schedule SE: Self-
EXEMPTION FOR SOME FULL-TIME STUDENTS
Some student workers are exempt from FICA tax. Students enrolled at least half-time in a university and working part-time for the same university are exempted from FICA payroll taxes, so long as their relationship with the university is primarily an educational one. In order to be exempt from FICA payroll taxes, a student's work must be "incident to" pursuit of a course of study, which is rarely the case with full-time employment. However full-time college students are never exempt from FICA taxes on work performed off-campus.
Medical residents working full-time are not considered students and are not exempt from FICA payroll taxes, according to a United States Supreme Court ruling in 2011.
EXEMPTION FOR EMPLOYEES OF SOME STATE GOVERNMENTS AND LOCAL GOVERNMENTS
A number of state and local employers and their employees in the states of Alaska, California, Colorado, Illinois, Louisiana, Maine, Massachusetts, Nevada, Ohio, and Texas are currently exempt from paying the Social Security portion of FICA taxes. They provide alternative retirement and pension plans to their employees. FICA initially did not apply to state and local governments, which were later given the option of participating. Over time, most have elected to participate, but a substantial number remain outside the system.
EXEMPTION FOR SOME NONRESIDENT ALIENS
Some nonresident aliens are exempt from FICA tax.
* Nonresident aliens who are employees of foreign governments are
exempt from FICA on wages paid in their official capacities as foreign
* Nonresident aliens who are employed by a foreign employer as a
crew member are exempt from FICA on wages paid for working on a
foreign ship or foreign aircraft.
* Nonresident aliens who are students, scholars, professors,
teachers, trainees, researchers, physicians, au pairs, or summer camp
workers and are temporarily in the
EXEMPTION FOR MEMBERS OF SOME RELIGIOUS GROUPS
Members of certain religious groups, such as
In order to apply to become exempt from paying FICA tax under this provision, the person must file Form 4029, which certifies that the person:
* Waives the person's rights to all benefits under the Social Security Act ; * Is a member of a recognized religious group that is conscientiously opposed to accepting benefits under a private plan or system that makes payments in the event of death, disability, or retirement , or which makes payments towards the costs of or provides for medical care, including the benefits of any insurance system established by Social Security ; * Is a member of a religious group that makes a reasonable provision of food, shelter, and medical care for its dependent members and has done so continuously since December 31, 1950; and * Has never received or been entitled to any benefits payable under Social Security programs.
People who claim the above exemption must agree to notify the
Internal Revenue Service
EXEMPTION FOR SOME ALIENS ON TEMPORARY WORK ASSIGNMENT
When a person temporarily works outside their country of origin, the
person may be covered under two different countries' social security
programs for the same work. In order to relieve a person of
double-taxation, the certain countries and the
Aliens whose employer sends them to the
In order to claim an exemption from paying FICA tax, the alien worker must be on a temporary assignment of no more than five years and the alien worker must have a certificate from the country stating that the worker will continue to be covered by the country's social security system while the worker is in the United States.
EXEMPTION FOR SOME FAMILY EMPLOYEES
When a parent employs a child under age 18 (or under age 21 for domestic service ), payments to the child are exempt from FICA tax. The exemption also applies when a child is employed by a partnership in which each partner is a parent of the child. The exemption does not apply when the child is employed by a corporation or a partnership with partners who are not the child's parent.
EXEMPTION FOR FOREIGN GOVERNMENTS AND SOME INTERNATIONAL ORGANIZATIONS
Foreign governments and are exempt from FICA tax on payments to their employees. International organizations are also exempt if the organization is listed in the International Organizations Immunities Act .
If an employee is either a U.S. citizen, then the employee must typically pay self-employment tax on earnings from work performed in the United States.
EXEMPTION FOR CERTAIN EMERGENCY WORKERS
If a state or local government's employees were hired on a temporary basis in response to a specific unforeseen fire, storm, snow, earthquake, flood, or a similar emergency, and the employee is not intended to become a permanent employee, then payments to that employee are exempt from FICA tax.
EXEMPTION FOR CERTAIN NEWSPAPER CARRIERS
Payments to newspaper carriers under age 18 are exempt from FICA tax.
EXEMPTION FOR SOME REAL ESTATE AGENTS AND SALESPEOPLE
Compensation for real estate agents and salespeople is exempt from FICA tax under certain circumstances. The compensation is exempt if substantially all compensation is directly related to sales or other output, rather than to the number of hours worked, and there is a written contract stating that the individuals will not be treated as employees for federal tax purposes. The individual must typically pay self-employment tax on the compensation.
Prior to the
* The U.S. had no federal-government-mandated retirement savings; consequently, for those people who had not voluntarily saved money throughout their working lives, the end of their work careers was the end of all income. * Similarly, the U.S. had no federal-government-mandated disability income insurance to provide for citizens disabled by injuries (of any kind—non-work-related); consequently, for most people, a disabling injury meant no more income (since most people have little to no income except earned income from work). * In addition, there was no federal-government-mandated disability income insurance to provide for people unable to ever work during their lives, such as anyone born with severe mental retardation . * Further, the U.S. had no federal-government-mandated health insurance for the elderly; consequently, for many people, the end of their work careers was the end of their ability to pay for medical care.
In the 1930s, the
In the 1960s, Medicare was introduced to rectify the fourth problem (health care for the elderly). The FICA tax was increased in order to pay for this expense.
In December 2010, as part of the legislation that extended the Bush
tax cuts (called the
In March 2014, the Supreme Court reversed a lower court decision in U.S. v. Quality Stores, Inc. The court held that severance packages are taxable wages for FICA purposes.
The Social Security component of the FICA tax is regressive . That
is, the effective tax rate regresses, or decreases, as income
increases beyond the compensation limit or wage base limit amount.
The Social Security component is a flat tax for wage levels under the
Social Security Wage Base
The earnings above the wage base limit amount are not, however, taken
into account in the Primary
The FICA tax also is not imposed on unearned income , including interest on savings deposits, stock dividends, and capital gains such as profits from the sale of stock or real estate. The proportion of total income that is exempt from FICA tax as "unearned income" tends to rise with higher income brackets.
Some argue that since Social Security taxes are eventually returned
to taxpayers, with interest, in the form of Social Security benefits,
the regressiveness of the tax is effectively negated. That is, the
taxpayer gets back what he or she put into the Social Security system.
* FICO , a similar-sounding acronym in the world of personal finance
that some people sometimes confuse with FICA
* ^ The FICA tax is imposed under the FEDERAL INSURANCE
CONTRIBUTIONS ACT, which is codified as I.R.C. ch. 21
* ^ O\'Sullivan, Arthur ; Sheffrin, Steven M. (2003). Economics:
Principles in Action. Upper Saddle River, New Jersey 07458: Pearson
Prentice Hall. p. 367. ISBN 0-13-063085-3 .
* ^ "Policy Basics: Federal Payroll Taxes". Center on Budget and
Policy Priorities. April 15, 2013. Retrieved November 17, 2013.
* ^ Kevin A. Hassett, March 29, 2005, "Is the Payroll