Federal Insurance Contributions Act (FICA)

The FICA tax, being part of the Internal Revenue Tax code since 1939, is a payroll tax enforced upon employees and employers by the federal government to fund Social Security and Medicare. Social Security benefits old-age as well as survivors and disability insurance, Medicare funds hospital insurance.

In 2005, the employee’s share of the Social Security portion of the tax was 6.2% of gross compensation – earnings before any deductions – up to a limit of $90,000.00 of compensation (resulting in a maximum of $5,580.00). This limit, known as the Security Wage Base, goes up annually based on average national wages. In 2010, the employee’s share was 6.2% of gross compensation up to a limit of $106,800.00 of compensation (resulting in a maximum of $6,621.00).

The employee’s share of the Medicare portion of the tax is 1.45% of wages, not limited by the amount of wages subject to the Medicare tax. The overall FICA Tax then amounts to 7.65%.

The above outlined calculation does not apply for 2011, however, since the Social Security rate for employees, not employers, was reduced to 4.20% leading to a reduction of the FICA tax rate for employees to 5.65%.

Employees who have more than one job or switched jobs during 2011 should also be aware of the possibility that they might have paid too much Social Security tax if their earnings exceeded $106,800 in the years 2009 to 2011. If this is the case, employee’s can claim a refund on form 1040 when filing their personal income tax return.

(c) Picture: Arvind Balaraman – freedigitalphotos.net

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