Federal Insurance Contributions Act (FICA) withholding is an income-based tax in the United States. It is a mandatory federal tax that is used to provide funding for Medicare and Social Security, which benefits retirees, children of the deceased, and individuals with disabilities. FICA withholding is usually achieved by a division of tax between the employer and the employee, and each party pays half of the necessary tax. Individuals who are self employed must pay the entire FICA tax, as self-employed workers are both employers and employees.
FICA withholding rates vary according to the year, the amount of taxable income, and the nature of an individual’s employment. For example, in 2010, 12.4% of income was required for Social Security and 2.9% of income was required for Medicare, for a total of 15.3%. Individuals who were not self employed split this tax in half with their employers, so each party accounted for 7.65% of the federal withholding. People who were self-employed paid the full 15.3% tax, as they were both the employers and the employees. Technically, self-employed individuals do not participate in FICA withholding, but instead they are obligated to pay the same tax rates under the Self-Employment Contributions Act, which was passed in 1954.
The 2010 Tax Relief Act lowered the Social Security tax rates for the 2011 tax year. Self-employed individuals now only pay a total of 13.3% of their income in FICA taxes, which remains at 2.9% of income for Medicare, and 10.4% of income for the 2011 year for Social Security tax. Regularly employed individuals only pay 4.2% of their income for Social Security tax, while employers are still required to contribute 6.2%.
There are several limits placed upon FICA withholding that involve maximum income and status as a full-time student. The maximum taxable income for 2010 and 2011 for regularly employed individuals is $106,800 US Dollars (USD), meaning that no individuals will pay Medicare or Social Security tax on additional income earned. Similarly, self-employed individuals are not required to pay self-employment tax on any income earned after $106,800 USD.
Full-time student status can sometimes exempt an individual from paying FICA withholding. The student must be enrolled in a university at least half-time, and the student must be employed by the same university as a part-time worker. The student must be pursuing a degree or other course of study, which prevents full-time employment income from being exempt from this tax. Work study students are eligible for the exemption but medical residents, who are being paid salaries, are not considered eligible.