FICA is an acronym for the Federal Insurance Contributions Act. This Act mandates that certain deductions be taken from employee pay and forwarded to the government to fund its social security and Medicare programs. These amounts are to be matched by employers, which therefore doubles the amount remitted to the government.

The Act also introduced the concept of a wage cap for social security deductions, where the social security tax only applies to the wages earned up to the amount of the wage cap. Wages earned above that level are not subject to the tax. The wage cap concept does not apply to Medicare deductions; thus, someone earning a high salary will see a Medicare deduction on his or her paycheck remittance advice, no matter how high the salary may be. The social security wage cap increases in most years, which means that the tax applies to more of a person's income over time, increasing the gross tax amount paid to the government.

The standard tax rates currently mandated under FICA are 6.2% for the social security tax and 1.45% for the Medicare tax. Certain employees at higher wage levels are also subject to a 0.9% Medicare surcharge. With employer matching, this means that 12.4% and 2.9% of wages, respectively, are forwarded to the government. If a person is self-employed, he or she must remit both parts of the tax to the government; in this case, the half of these taxes remitted on behalf of their business entity is allowable as a tax deduction.

Related Courses

Payroll Management