![Median household income and taxes](https://upload.wikimedia.org/wikipedia/commons/9/9f/Median_household_income_and_taxes.png)
The Federal Insurance Contributions Act (FICA ) is a
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
federal
payroll
A payroll is the list of employees of some company that is entitled to receive payments as well as other work benefits and the amounts that each should receive. Along with the amounts that each employee should receive for time worked or tasks pe ...
(or employment) contribution directed towards both employees and employers to fund
Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
and
Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.
Calculation
Overview
![Share of Federal Revenue from Different Tax Sources (Individual, Payroll, and Corporate) 1950 - 2010](https://upload.wikimedia.org/wikipedia/commons/f/fa/Share_of_Federal_Revenue_from_Different_Tax_Sources_%28Individual%2C_Payroll%2C_and_Corporate%29_1950_-_2010.gif)
The Federal Insurance Contributions Act is a tax mechanism
codified in
Title 26
The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...
, Subtitle C, Chapter 21 of the
United States Code
In the law of the United States, the Code of Laws of the United States of America (variously abbreviated to Code of Laws of the United States, United States Code, U.S. Code, U.S.C., or USC) is the official compilation and codification of the ...
.
Social security benefits include old-age, survivors, and
disability insurance (OASDI); Medicare provides hospital insurance benefits for the elderly. The amount that one pays in payroll taxes throughout one's working career is associated indirectly with the social security benefits annuity that one receives as a retiree. Consequently,
Kevin Hassett
Kevin Allen Hassett (born March 20, 1962) is an American economist who is a former Senior Advisor and Chairman of the Council of Economic Advisers in the Trump administration from 2017 to 2019. He has written several books and coauthored ''Dow 36 ...
wrote that FICA is not a tax because its collection is directly tied to benefits that one is entitled to collect later in life. However, the
United States Supreme Court
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
ruled in ''
Flemming v. Nestor
''Flemming v. Nestor'', 363 U.S. 603 (1960), was a United States Supreme Court case in which the Court upheld the constitutionality of Section 1104 of the 1935 Social Security Act. In this Section, Congress reserved to itself the power to amen ...
'' (1960) that the Social Security system is neither a pension nor an insurance program and that no one has an accrued property right to benefits from the system regardless of how much that person may have contributed. FICA therefore behaves as a tax for all practical purposes, earmarked for particular uses by Congress but fully subject to Congressional authority, including redirection.
The FICA tax applies to earned income only and is not imposed on investment income such as rental income, interest, or dividends. The Hospital Insurance (HI) portion of FICA, which funds
Medicare Part A hospital benefits, applies to all earned income, which the OASDI portion of the tax is imposed on earned income only up to cap annually set by Congress ($137,700 in 2020).
In 2004, the
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities (CBPP) is a progressive American think tank that analyzes the impact of federal and state government budget policies. A 501(c)(3) nonprofit organization, the Center's stated mission is to "conduct resear ...
stated that three-quarters of taxpayers pay more in payroll taxes than they do in income taxes. FICA is subject to neither the
standard deduction nor any personal exemption and so is generally considered to be a
regressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high ...
.
Regularly employed people
Since 1990, the employee's share of the Social Security portion of the FICA tax has been 6.2% of gross compensation up to a limit that adjusts with inflation.
The taxation limit in 2020 was $137,700 of gross compensation, resulting in a maximum Social Security tax for 2020 of $8,537.40.
[ This limit, known as the ]Social Security Wage Base
For the Old Age, Survivors and Disability Insurance (OASDI) tax or Social Security tax in the United States, the Social Security Wage Base (SSWB) is the maximum earned gross income or upper threshold on which a wage earner's Social Security tax may ...
, goes up each year based on average national wages and, in general, at a faster rate than the Consumer Price Index
A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.
Overview
A CPI is a statistica ...
(CPI-U). The employee's share of the Medicare portion of the tax is 1.45% of wages, with no limit on the amount of wages subject to the Medicare portion of the tax.[ Because some payroll compensation may be subject to federal and state income tax withholding in addition to Social Security tax withholding and Medicare tax withholding, the Social Security and Medicare taxes often account for only a portion of the total an employee pays.
The employer is also liable for 6.2% Social Security and 1.45% Medicare taxes, making the total Social Security tax 12.4% of wages and the total Medicare tax 2.9%. (Self-employed people are responsible for the entire FICA percentage of 15.3% (= 12.4% + 2.9%), since they are in a sense both the employer and the employed; see the section on self-employed people for more details.)
If a worker starts a new ]job
Work or labor (or labour in British English) is intentional activity people perform to support the needs and wants of themselves, others, or a wider community. In the context of economics, work can be viewed as the human activity that contr ...
halfway through the year and during that year has already earned an amount exceeding the Social Security tax wage base limit with the old employer, the new employer is not allowed to stop withholding
Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, Tax deduction at source or a ''Prélèvement à la source'', is income tax paid to the government by the payer of the income rather than by the recipient of the income. ...
until the wage base limit has been earned with the new employer (that is, without regard to the wage base limit earned under the old employer). There are some limited cases, such as a successor-predecessor employer transfer, in which the payments that have already been withheld can be counted toward the year-to-date total.
If a worker has overpaid toward Social Security by having more than one job or by having switched jobs during the year, that worker can file a request to have that overpayment counted as a credit for tax paid when he or she files a federal income tax return. If the taxpayer is due a refund, then the FICA tax overpayment is refunded.
Self-employed people
A tax similar to the FICA tax is imposed on the earnings of self-employed
Self-employment is the state of working for oneself rather than an employer. Tax authorities will generally view a person as self-employed if the person chooses to be recognised as such or if the person is generating income for which a tax return n ...
individuals, such as independent contractor
Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...
s and members of a partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments o ...
. This tax is imposed not by the Federal Insurance Contributions Act but instead by the Self-Employment Contributions Act of 1954, which is codified as Chapter 2 of Subtitle A of the Internal Revenue Code, through (the "SE Tax Act"). Under the SE Tax Act, self-employed people are responsible for the entire percentage of 15.3% (= 12.4% oc. Sec.+ 2.9% edicare; however, the 15.3% multiplier is applied to 92.35% of the business's ''net earnings from self-employment'', rather than 100% of the gross earnings; the difference, 7.65%, is half of the 15.3%, and makes the calculation fair in comparison to that of regular (non-self-employed) employees.
Exemptions
Some students
Some student workers are exempt from FICA tax. Students enrolled at least half-time in a university and working part-time for the same university are exempted from FICA payroll taxes if and only if their relationship with the university is primarily an educational one. In order to be exempt from FICA payroll taxes, a student's work must be "incident to" the pursuit of a course of study, which is rarely the case with full-time employment.[ However full-time college students are never exempt from FICA taxes on work performed off-campus.][
]Medical resident
Residency or postgraduate training is specifically a stage of graduate medical education. It refers to a qualified physician (one who holds the degree of MD, DO, MBBS, MBChB), veterinarian ( DVM or VMD) , dentist ( DDS or DMD) or podiatrist ( ...
s working full-time are not considered students and are not exempt from FICA payroll taxes, according to a United States Supreme Court
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
ruling in 2011.[Mayo Foundation for Medical Education and Research Et Al. v. United States]
(pdf). ''Supreme Court of the United States.'' January 11, 2011.
A student enrolled and regularly attending classes at a school, college, or university who performs work as a cook, waiter, butler, maid, janitor, laundress, furnaceman, handyman, gardener, housekeeper, housemother, or similar duties in or around the club rooms or house of a local college club, or in or about the club rooms or house of a local chapter of a college fraternity or sorority, are exempt from FICA tax.[26 CFR 31.3121(b)(2)-1]
. via Legal Information Institute, Cornell University Law School. Retrieved December 23, 2018. If the location's primary purpose is to provide room or board, however, then the work is subject to FICA tax.[ Performing these services for an alumni club or alumni chapter also does not qualify for the exemption from FICA tax.][
]
Employees of some state governments and local governments
A number of state and local employers and their employees in the states of Alaska, California, Colorado, Illinois, Louisiana, Maine, Massachusetts, Nevada, Ohio, and Texas are currently exempt from paying the Social Security portion of FICA taxes. They provide alternative retirement and pension plans to their employees. FICA initially did not apply to state and local governments, which were later given the option of participating. Over time, most have elected to participate, but a substantial number remain outside the system.
Certain payments by Native Americans, Native Americans tribal governments, and Native Americans entities
Payments to members of a federally recognized Native American tribe for services performed as council members are not subject to FICA.[Federal-State Reference Guide]
. ''Internal Revenue Service''. November 2004. p. 2-6.
If a member of a federally recognized Native American tribe that has recognized fishing rights or a qualified Native American entity employs another member of the same Native American tribe for a fishing rights-related activity, the wages are exempt from FICA.[
]
Some nonresident aliens
Some nonresident alien
In law, an alien is any person (including an organization) who is not a citizen or a national of a specific country, although definitions and terminology differ to some degree depending upon the continent or region. More generally, however, ...
s are exempt from FICA tax.
* Nonresident aliens who are employees of foreign governments are exempt from FICA on wages paid in their official capacities as foreign government employees.[Social Security/Medicare and Self-Employment Tax Liability of Foreign Students, Scholars, Teachers, Researchers, and Trainees]
. ''Internal Revenue Service''. August 23, 2016. Retrieved May 12, 2017.
* Nonresident aliens who are employed by a foreign employer as a crew member are exempt from FICA on wages paid for working on a foreign ship or foreign aircraft.[
* Nonresident aliens who are students, scholars, professors, teachers, trainees, researchers, physicians, au pairs, or summer camp workers and are temporarily in the United States in F-1, J-1, M-1, Q-1, or Q-2 nonimmigrant status are exempt from FICA on wages paid to them for services that are allowed by their visa status and are performed to carry out the purposes the visa status.][
* Nonresident aliens who are employees of international organizations are exempt from FICA on wages paid by international organizations.][
* Nonresident aliens who are on an ]H-2A
H-IIA (H-2A) is an active expendable launch system operated by Mitsubishi Heavy Industries (MHI) for the Japan Aerospace Exploration Agency. These liquid fuel rockets have been used to launch satellites into geostationary orbit; lunar orbit ...
, H-2B, or H-2R visa and are residents of the Philippines
The Philippines (; fil, Pilipinas, links=no), officially the Republic of the Philippines ( fil, Republika ng Pilipinas, links=no),
* bik, Republika kan Filipinas
* ceb, Republika sa Pilipinas
* cbk, República de Filipinas
* hil, Republ ...
are exempt from FICA on wages paid for work performed in Guam
Guam (; ch, Guåhan ) is an organized, unincorporated territory of the United States in the Micronesia subregion of the western Pacific Ocean. It is the westernmost point and territory of the United States (reckoned from the geographic cent ...
.[
* Nonresident aliens who are on an ]H-2A visa
An H-2A visa allows a foreign national worker into the United States for temporary agricultural work. There are several requirements of the employer in regard to this visa. The H-2A temporary agricultural program establishes a means for agricu ...
are exempt from FICA.[
]
Members of some religious groups
Members of certain religious groups, such as the Mennonites
Mennonites are groups of Anabaptist Christian church communities of denominations. The name is derived from the founder of the movement, Menno Simons (1496–1561) of Friesland. Through his writings about Reformed Christianity during the Radic ...
and the Amish
The Amish (; pdc, Amisch; german: link=no, Amische), formally the Old Order Amish, are a group of traditionalist Anabaptist Christian church fellowships with Swiss German and Alsatian origins. They are closely related to Mennonite churches ...
, may apply to be exempt from paying FICA tax.[Are members of religious groups exempt from paying Social Security taxes?]
''Social Security Administration''. January 9, 2017. [Form 4029: Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits]
. ''Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
''. September 2014. These religious groups consider insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
to be a lack of trust in God, and see it as their religious duty to provide for members who are sick, disabled, or elderly.
In order to apply to become exempt from paying FICA tax under this provision, the person must file Form 4029, which certifies that the person:
* Waives the person's rights to all benefits under the Social Security Act
The Social Security Act of 1935 is a law enacted by the 74th United States Congress and signed into law by US President Franklin D. Roosevelt. The law created the Social Security program as well as insurance against unemployment. The law was pa ...
;[
* Is a member of a recognized religious group that is conscientiously opposed to accepting benefits under a private plan or system that makes payments in the event of death, disability, or retirement, or which makes payments towards the costs of or provides for medical care, including the benefits of any insurance system established by Social Security;][
* Is a member of a religious group that makes a reasonable provision of food, shelter, and medical care for its dependent members and has done so continuously since December 31, 1950;][ and
* Has never received or been entitled to any benefits payable under Social Security programs.][
People who claim the above exemption must agree to notify the Internal Revenue Service within 60 days of either leaving the religious group or no longer following the established teachings of the religious group.][
]
Some aliens on temporary work assignment
When a person temporarily works outside their country of origin, the person may be covered under two different countries' social security programs for the same work.[International Agreements: U.S. International Social Security Agreements]
. ''Social Security Administration''. Retrieved May 12, 2017. In order to relieve a person of double-taxation, the certain countries and the United States have entered into tax treaties, known as totalization agreements.[
Aliens whose employer sends them to the United States on a temporary work assignment may be exempt from paying FICA tax on their earnings from working in the United States if there is a totalization agreement between the United States and the worker's home country.][ Countries who have such a tax treaty with the United States include ]Australia
Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
, Austria
Austria, , bar, Östareich officially the Republic of Austria, is a country in the southern part of Central Europe, lying in the Eastern Alps. It is a federation of nine states, one of which is the capital, Vienna, the most populous ...
, Belgium
Belgium, ; french: Belgique ; german: Belgien officially the Kingdom of Belgium, is a country in Northwestern Europe. The country is bordered by the Netherlands to the north, Germany to the east, Luxembourg to the southeast, France to th ...
, Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
, Chile
Chile, officially the Republic of Chile, is a country in the western part of South America. It is the southernmost country in the world, and the closest to Antarctica, occupying a long and narrow strip of land between the Andes to the east a ...
, Czech Republic
The Czech Republic, or simply Czechia, is a landlocked country in Central Europe. Historically known as Bohemia, it is bordered by Austria to the south, Germany to the west, Poland to the northeast, and Slovakia to the southeast. The ...
, Denmark
)
, song = ( en, "King Christian stood by the lofty mast")
, song_type = National and royal anthem
, image_map = EU-Denmark.svg
, map_caption =
, subdivision_type = Sovereign state
, subdivision_name = Danish Realm, Kingdom of Denmark
...
, Finland
Finland ( fi, Suomi ; sv, Finland ), officially the Republic of Finland (; ), is a Nordic country in Northern Europe. It shares land borders with Sweden to the northwest, Norway to the north, and Russia to the east, with the Gulf of B ...
, France
France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
, Germany
Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwe ...
, Greece
Greece,, or , romanized: ', officially the Hellenic Republic, is a country in Southeast Europe. It is situated on the southern tip of the Balkans, and is located at the crossroads of Europe, Asia, and Africa. Greece shares land borders with ...
, Hungary
Hungary ( hu, Magyarország ) is a landlocked country in Central Europe. Spanning of the Carpathian Basin, it is bordered by Slovakia to the north, Ukraine to the northeast, Romania to the east and southeast, Serbia to the south, Croatia a ...
, Ireland
Ireland ( ; ga, Éire ; Ulster Scots dialect, Ulster-Scots: ) is an island in the Atlantic Ocean, North Atlantic Ocean, in Northwestern Europe, north-western Europe. It is separated from Great Britain to its east by the North Channel (Grea ...
, Japan
Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
, Luxembourg
Luxembourg ( ; lb, Lëtzebuerg ; french: link=no, Luxembourg; german: link=no, Luxemburg), officially the Grand Duchy of Luxembourg, ; french: link=no, Grand-Duché de Luxembourg ; german: link=no, Großherzogtum Luxemburg is a small lan ...
, Netherlands
)
, anthem = ( en, "William of Nassau")
, image_map =
, map_caption =
, subdivision_type = Sovereign state
, subdivision_name = Kingdom of the Netherlands
, established_title = Before independence
, established_date = Spanish Netherl ...
, Norway
Norway, officially the Kingdom of Norway, is a Nordic country in Northern Europe, the mainland territory of which comprises the western and northernmost portion of the Scandinavian Peninsula. The remote Arctic island of Jan Mayen and t ...
, Poland
Poland, officially the Republic of Poland, is a country in Central Europe. It is divided into 16 administrative provinces called voivodeships, covering an area of . Poland has a population of over 38 million and is the fifth-most populous ...
, Portugal
Portugal, officially the Portuguese Republic ( pt, República Portuguesa, links=yes ), is a country whose mainland is located on the Iberian Peninsula of Southwestern Europe, and whose territory also includes the Atlantic archipelagos of ...
, Slovakia
Slovakia (; sk, Slovensko ), officially the Slovak Republic ( sk, Slovenská republika, links=no ), is a landlocked country in Central Europe. It is bordered by Poland to the north, Ukraine to the east, Hungary to the south, Austria to the s ...
, South Korea
South Korea, officially the Republic of Korea (ROK), is a country in East Asia, constituting the southern part of the Korea, Korean Peninsula and sharing a Korean Demilitarized Zone, land border with North Korea. Its western border is formed ...
, Spain
, image_flag = Bandera de España.svg
, image_coat = Escudo de España (mazonado).svg
, national_motto = ''Plus ultra'' (Latin)(English: "Further Beyond")
, national_anthem = (English: "Royal March")
, i ...
, Sweden
Sweden, formally the Kingdom of Sweden,The United Nations Group of Experts on Geographical Names states that the country's formal name is the Kingdom of SwedenUNGEGN World Geographical Names, Sweden./ref> is a Nordic country located on ...
, Switzerland
). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
, and United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
.
In order to claim an exemption from paying FICA tax, the alien worker must be on a temporary assignment of no more than five years and the alien worker must have a certificate from the country stating that the worker will continue to be covered by the country's social security system while the worker is in the United States.[
]
Some family employees
When a parent employs a child under age 18 (or under age 21 for domestic service
A domestic worker or domestic servant is a person who works within the scope of a residence. The term "domestic service" applies to the equivalent occupational category. In traditional English contexts, such a person was said to be "in service ...
), payments to the child are exempt from FICA tax.[Publication 15: (Circular E), Employer's Tax Guide]
. ''Internal Revenue Service''. 2017. p. 12–13. The exemption also applies when a child is employed by a partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments o ...
in which each partner is a parent of the child.[ The exemption does not apply when the child is employed by a ]corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
or a partnership with partners who are not the child's parent.[
]
Foreign governments and some international organizations
Foreign governments are exempt from FICA tax on payments to their employees.[Publication 15: (Circular E), Employer's Tax Guide]
. ''Internal Revenue Service''. 2017. p. 37. International organization
An international organization or international organisation (see spelling differences), also known as an intergovernmental organization or an international institution, is a stable set of norms and rules meant to govern the behavior of states an ...
s are also exempt if the organization is listed in the International Organizations Immunities Act
The International Organizations Immunities Act (IOIA) is a United States federal law enacted in 1945. It "established a special group of foreign or international organizations whose members could work in the U.S. and enjoy certain exemptions from ...
.[Persons Employed by a Foreign Government or International Organization - Federal Insurance Contributions Act (FICA)]
. ''Internal Revenue Service''. October 31, 2016.
If an employee is a U.S. citizen, then the employee must typically pay self-employment tax on earnings from work performed in the United States.[
]
Services performed by certain individuals hired to be relieved from unemployment
If a state or local government pays individuals for services performed to be relieved from unemployment, the payments to the individuals are exempt from FICA tax.
. ''Internal Revenue Service''. Retrieved November 19, 2018. The services must not be performed by individuals under other types of programs.[ Payments are not exempt from FICA tax if the program's primary purpose is to increase an individual's chances of employment by providing training and work experience.][
]
Services performed by inmates
Payments to inmates of a prison for services performed for the state or local government that operates the prison are exempt from FICA tax, regardless of the location where the services are performed.
. ''Internal Revenue Service''. Retrieved November 19, 2018.[Publication 963]
. ''Internal Revenue Service''. November 2011. p. 3-22.[Bowen, Denise Y. (January 2006). "Amounts Paid to Inmates". ''Federal, State and Local Governments (FSLG) Newsletter''. Internal Revenue Service. p. 3–5.] Services performed as part of a work-release program are exempt from FICA tax if and only if the individuals are not considered employees under common law, such as when the individual has control over what work is done and how the work it is done.[
]
Services performed by patients
Payments to patients of an institution for services performed for the state of local government that operates the institution are exempt from FICA tax.[ Services performed by patients as part of an institution's rehabilitative program or therapeutic program are exempt from FICA tax.][
]
Certain emergency workers
If a state or local government's employees were hired on a temporary basis in response to a specific unforeseen fire, storm, snow, earthquake, flood, or a similar emergency, and the employee is not intended to become a permanent employee, then payments to that employee are exempt from FICA tax.
. ''Internal Revenue Service''. Retrieved November 19, 2018.[Publication 15: (Circular E), Employer's Tax Guide]
. ''Internal Revenue Service''. 2017. p. 38. In order to qualify for the exemption from FICA tax, the employee must have been hired to work temporarily in connection with an unforeseen emergency, such as an individual temporarily hired to battle a major forest fire, to respond to a volcano eruption, or to help people affected by a severe earthquake or flood.[ Regular long-term police employees and regular long-term fire employees do not qualify under this particular exemption from FICA tax.][
]
Certain newspaper carriers
Payments to newspaper carrier
A paperboy is someoneoften an older child or adolescentwho distributes printed newspapers to homes or offices on a regular route, usually by bicycle or automobile. In Western nations during the heyday of print newspapers during the early 20th ce ...
s under age 18 are exempt from FICA tax.[Publication 15: (Circular E), Employer's Tax Guide]
. ''Internal Revenue Service''. 2017. p. 39.
Some real estate agents and salespeople
Compensation for real estate agent
A real estate agent or real estate broker is a person who represents sellers or buyers of real estate or real property. While a broker may work independently, an agent usually works under a licensed broker to represent clients. Brokers and age ...
s and salespeople
Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale.
The seller, or the provider of the goods or services, completes a sale in ...
is exempt from FICA tax under certain circumstances.[Publication 15: (Circular E), Employer's Tax Guide]
. ''Internal Revenue Service''. 2017. p. 40.[Publication 15-A: Employer's Supplemental Tax Guide]
. ''Internal Revenue Service''. 2017. p. 6–7. The compensation is exempt if substantially all compensation is directly related to sales or other output, rather than to the number of hours worked, and there is a written contract stating that the individuals will not be treated as employees for federal tax purposes.[ The individual must typically pay self-employment tax on the compensation.][
]
History
Prior to the Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
, the following presented difficulties for Americans:
[Historical Background and Development of Social Security]
Social Security Administration
* The U.S. had no federally mandated retirement savings; consequently, for those people who had not voluntarily saved money throughout their working lives, the end of their work careers was the end of all income.
* Similarly, the U.S. had no federally mandated disability income insurance to provide for citizens disabled by injuries (of any kind—non-work-related); consequently, for most people, a disabling injury meant no more income (since most people have little to no income except earned income from work).
* In addition, there was no federally mandated disability income insurance to provide for people unable to ever work during their lives, such as anyone born with severe mental retardation
Intellectual disability (ID), also known as general learning disability in the United Kingdom and formerly mental retardation,Rosa's Law, Pub. L. 111-256124 Stat. 2643(2010). is a generalized neurodevelopmental disorder characterized by signific ...
.
* Further, the U.S. had no federally mandated health insurance for the elderly; consequently, for many people, the end of their work careers was the end of their ability to pay for medical care.
In the 1930s, the New Deal
The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Cons ...
introduced Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
to rectify the first three problems (retirement, injury-induced disability, or congenital disability). It introduced the FICA tax as the means to pay for Social Security.
In the 1960s, Medicare was introduced to rectify the fourth problem (health care for the elderly). The FICA tax was increased in order to pay for this expense.
In December 2010, as part of the legislation that extended the Bush tax cuts (called the ), the government negotiated a temporary, one-year reduction in the FICA payroll tax. In February 2012, the tax cut was extended for another year.
Under FICA, the payroll tax applies to "wages" (defined by the Act as "remuneration for employment"). In 2014, the Supreme Court unanimously held in ''United States v. Quality Stores, Inc.'' that severance pay is taxable wages for FICA purposes.
United States v. Quality Stores, Inc.
', 572 U.S. 141 (2014).
In August 2020
2020 was heavily defined by the COVID-19 pandemic, which led to global Social impact of the COVID-19 pandemic, social and Economic impact of the COVID-19 pandemic, economic disruption, mass cancellations and postponements of events, COVID- ...
, President Donald Trump signed an executive order to temporarily suspend collection of the tax from September to December 2020. Critics fear this move will lead to more underfunding of the Social Security Trust Fund
The Federal Old-Age and Survivors Insurance Trust Fund and Federal Disability Insurance Trust Fund (collectively, the Social Security Trust Fund or Trust Funds) are trust funds that provide for payment of Social Security (Old-Age, Survivors, and D ...
and Medicare trust fund.
Criticism
The Social Security component of the FICA tax is regressive. That is, the effective tax rate regresses, or decreases, as income increases beyond the compensation limit or wage base limit amount. The Social Security component is a flat tax for wage levels under the Social Security Wage Base (see "Regular" employees above). Because no tax is owed on wages above the wage base limit amount, the total tax rate declines as wages increase beyond that limit. In other words, for wage levels above the limit, the absolute dollar amount of tax owed remains constant.
The earnings above the wage base limit amount are not, however, taken into account in the Primary Insurance Amount (PIA) to determine benefits payable under the various insurance programs of social security.
The FICA tax also is not imposed on unearned income
Unearned income is a term coined by Henry George to refer to income gained through ownership of land and other monopoly. Today the term often refers to income received by virtue of owning property (known as property income), inheritance, pensions ...
, including interest on savings deposits, stock dividends, and capital gains such as profits from the sale of stock or real estate. The proportion of total income that is exempt from FICA tax as "unearned income" tends to rise with higher income brackets.
Some, including Third Way
The Third Way is a centrist political position that attempts to reconcile right-wing and left-wing politics by advocating a varying synthesis of centre-right economic policies with centre-left social policies. The Third Way was born from a ...
, argue that since Social Security taxes are eventually returned to taxpayers, with interest, in the form of Social Security benefits, the regressiveness of the tax is effectively negated. That is, the taxpayer gets back (more or less) what they put into the Social Security system. Others, including ''The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econo ...
'' and the Congressional Budget Office
The Congressional Budget Office (CBO) is a federal agency within the legislative branch of the United States government that provides budget and economic information to Congress.
Inspired by California's Legislative Analyst's Office that manages ...
, point out that the Social Security system as a whole is progressive in the lower income brackets. Individuals with lower lifetime average wages receive a larger benefit (as both a percentage of their lifetime average wage income and a percentage of Social Security taxes paid) than do individuals with higher lifetime average wages; but for some lower earners, shorter lifetimes may negate the benefits.[Is Social Security Progressive?]
by the Congressional Budget Office
The Congressional Budget Office (CBO) is a federal agency within the legislative branch of the United States government that provides budget and economic information to Congress.
Inspired by California's Legislative Analyst's Office that manages ...
, retrieved July 23, 2008
See also
*Cafeteria plan
A cafeteria plan or cafeteria system is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. Its name comes from the earliest such plans that allowed employees to choose between differe ...
*FICO
FICO (legal name: Fair Isaac Corporation), originally Fair, Isaac and Company, is a data analytics company based in Bozeman, Montana, focused on credit scoring services. It was founded by Bill Fair and Earl Isaac in 1956. Its FICO score, a me ...
, a similar initialism sometimes confused with FICA
*Form W-2
Form W-2 (officially, the "Wage and Tax Statement") is an Internal Revenue Service (IRS) tax form used in the United States to report wages paid to employees and the taxes withheld from them. Employers must complete a Form W-2 for each employee ...
*Income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
*Medicare (United States)
Medicare is a government national health insurance program in the United States, begun in 1965 under the Social Security Administration (SSA) and now administered by the Centers for Medicare and Medicaid Services (CMS). It primarily provides h ...
* National Insurance contribution (NIC), a somewhat similar tax in the United Kingdom
*Social Security (United States)
In the United States, Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration (SSA). The original Social Security Act ...
* Trust Fund Recovery Penalty, the personal liability of employers who fail to pay the tax
Notes
References
External links
Annual maximum taxable earnings and contribution rates, 1937-2006
from the Social Security Administration
The United States Social Security Administration (SSA) is an Independent agencies of the United States government, independent agency of the Federal government of the United States, U.S. federal government that administers Social Security (United ...
Summary of Social Security Amendments of 1983
from the Social Security Administration
The United States Social Security Administration (SSA) is an Independent agencies of the United States government, independent agency of the Federal government of the United States, U.S. federal government that administers Social Security (United ...
Student Exception to FICA Tax
from the Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
Go Ahead and Lift the Cap
discussing 2008 US presidential campaign plans regarding payroll taxes, from ''Dollars & Sense
''Dollars & Sense'' is a magazine focusing on economics from a progressive perspective, published by Dollars & Sense, Inc, which also publishes textbooks in the same genre.
''Dollars & Sense'' describes itself as publishing "economic news and ana ...
'' magazine
{{DEFAULTSORT:Federal Insurance Contributions Act Tax
United States federal taxation legislation
Social security in the United States
Medicare and Medicaid (United States)
United States federal welfare and public assistance legislation
Withholding taxes