FICA stands for Federal Insurance Contributions Act. FICA taxes are payroll taxes that are deducted from an employee's paycheck to fund two major social welfare programs in the United States: Social Security and Medicare.
Social Security provides retirement, disability, and survivor benefits to eligible individuals and their families. Medicare provides health insurance to individuals who are 65 or older, as well as to younger people with certain disabilities.
FICA taxes are calculated as a percentage of an employee's gross wages. As of 2021, the Social Security tax rate is 6.2% on wages up to $142,800, while the Medicare tax rate is 1.45% on all wages. Employers are also required to pay a matching amount of FICA taxes for each employee.
There are some exemptions and deductions for FICA taxes. For example, certain religious groups and foreign government employees may be exempt from paying FICA taxes. Additionally, employees who earn less than a certain amount may be eligible for the Earned Income Tax Credit, which can reduce their FICA tax liability.
Yes, self-employed individuals are subject to FICA taxes, but they are responsible for paying both the employer and employee portions of the taxes. This is known as the self-employment tax, and it is currently set at 15.3% of net earnings.