Federal Insurance Contribution Act (FICA) Payroll Taxes comprise two parts: Social Security and Medicare taxes.
This is referred to as a payroll tax as it is a deduction that occurs before the employee receives their pay. Employers are required to withhold a contribution for Social Security and Medicare taxes from an employee’s pay under this act. However, FICA taxes are unique in comparison to other payroll taxes as there is a requirement for both withholding a contribution from an employee's wages as well as an employer's portion of the taxes that must be paid.
As with all taxes payable, penalties for late or incorrect deposits of Social Security and Medicare taxes apply.
Part One: Social Security Tax
Social Security tax (also called OASDI - Old-Age, Survivors, and Disability Insurance) provides insurance for retirement, death, or disability. Under FICA employers and employees both contribute equal amounts of 6.2% each (12.4% total).
The Social Security tax is subject to a maximum dollar limit of an employee’s wages, which is adjusted annually for inflation. As an example the maximum amount that is subject to the Social Security tax for 2018 is $128,400. In other words, only the first $128,400 of an employee’s wages can be taxed.
Part Two: Medicare Tax
Medicare taxes are used to fund a government health insurance program, which provides subsidized healthcare and hospital insurance benefits to retirees (individuals 65 years and older) and the disabled. This health insurance program covers hospital care, nursing, hospice care, medical equipment, prescriptions, and other medical expenses.
The employer and employee each pay 1.45 percent (2.9% total). Unlike the Social Security tax, there is no cap or limit on income – all income is taxable.
Since 2013 an additional 0.9% Medicare tax applies when the employee earns over $200,000. This additional 0.9% surtax is only withheld to the extent that an employee is paid wages in excess of $200,000 in a calendar year. In other words the surcharge is only applied from the pay period in which the employee’s annual pay for that calendar year exceeds $200,000.
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