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Tax season is here, and understanding the terms, forms, and deadlines is essential to filing taxes responsibly. One important term to know is FICA, which stands for the Federal Insurance Contributions Act, a federal payroll tax that takes out 7.65% of your gross wages for federal taxes. Based on a report by Nerd Wallet on December 6, 2023, these taxes fund Social Security and Medicare programs, which include retirement, disability, survivors’, and children’s benefits.
The FICA tax consists of two parts: 6.2% for Social Security and 1.45% for Medicare, with an additional 0.9% for Medicare taxes paid by individuals with earned income of over $200,000, according to the IRS. Although FICA and Social Security taxes are related, they are not the same. Social Security taxes are the 6.2% taken out of your paycheck each month, up to $160,300, the 2023 taxable maximum.
Certain wages are exempt from FICA taxes, such as those of employed students and nonresident aliens, while self-employed individuals are subject to a higher rate known as the “self-employment tax,” as reported by USA Today on February 4, 2023.
If Social Security taxes were withheld in error from exempt pay, a refund can be obtained from the employer or claimed through the IRS.
Understanding FICA and its exemptions is crucial to filing taxes responsibly and avoiding any errors that could lead to penalties.
