FICA is calculated based on a percentage of gross earnings.
For the 2009 and 2010 tax years, FICA taxes total approximately 7.65% of gross earnings per year. Gross earnings are funds earned prior to any deductions. FICA funds distribution is two-fold:
- Old-Age, Survivors, and Disability Insurance or OASDI receives 6.2%, and
- Medicare receives 1.45% of all FICA funds.
What Is FICA?
The Federal Insurance Contributions Act (FICA) is administered by the Internal Revenue Service (IRS) under the Internal Revenue Code, 26 U.S.C. Chapter 21 and applies to both employers and employees.
Who Pays FICA
The FICA tax is paid by employers on wages paid to employees, by employees on wages received, and by both employers and employees on tips awarded in the food service industry.
Contractors are not considered employees, so FICA is not withheld in services reimbursement by the contracting agency. Self-employed personnel pay into a different fund, also administered by the IRS, for funds earned by the business. If the contractor entity has employees who receive wages, the contractor is an employer, and both pay FICA taxes as outlined above.
Is FICA Tax Limited?
Unlike income taxes, FICA tax is limited. For both the 2009 and 2010 tax years, employers and employees contributed to FICA until the yearly maximum was met. For employees, that Social Security income limit amount reached $106,800.00. Social Security contributions ended at $6,621.60. The annual maximum contribution does not apply to the 1.45% designated for Medicare; that continues all year for both employer and employee.
If an employee met the maximum contribution with one employer then changed jobs, the new employer could not hold Social Security or FICA contributions until the employee met the yearly maximum with them. Any overpayment could be requested on the Federal Income Tax Return.
Unlike estimated T=taxes for the self-employed, any overpayment by the employer or employee cannot be credited to the next tax year’s contributions, however.
Under certain circumstances, full-time students can be exempt from paying FICA taxes if employed. People receiving public aid funds can be exempt, as well. Portions of income might be exempt for disabled workers, depending on employment status, among others.
Internal Revenue Code; 26 U.S.C. Chapter 21.
Social Security and Medicare Taxes. http://www.irs.gov/formspubs/article/0,,id=177943,00.html
IRS, publication 501 (2009), Exemptions, Standard Deduction, and Filing Information. http://www.irs.gov/publications/p501/index.html
John Wiley & Sons, Inc. “Essentials of Payroll Management and Accounting.” (c) 2003, by Steven M. Bragg.