Whenever anyone brings up payroll tax withholding, it's hard not to think of Jennifer Aniston's character in Friends asking, "Who's FICA? Why's he getting all my money?" Among all the reasons why money gets taken out of your paycheck, FICA is one of the more obscure items you might find.
Yet for some workers, withholding for FICA is actually the biggest amount taken out of their pay, outpacing other items like federal and state income taxes and even employee premiums for health insurance coverage. Moreover, although the currently planned changes for FICA tax in 2020 are minimal, some lawmakers are looking at more dramatic moves.
What FICA stands for
FICA refers to the Federal Insurance Contributions Act, which requires employers to withholding money from their employee's paychecks. The money that's withheld goes toward funding two federal government programs: Social Security and Medicare.
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If your paycheck doesn't actually have the word FICA on it, that doesn't mean that you're not paying those taxes. Some paychecks separate out the portions of FICA tax that go toward Social Security and Medicare on two separate lines. Regardless, the money that goes to those two programs helps you establish your eligibility to receive benefits from them later in your life.
One tax, two rates
Even if FICA is listed as a single line on your paycheck, there are actually two separate calculations that go into coming up with the amount of tax withheld. One corresponds to Social Security's rules, while the other incorporates Medicare requirements.
On the Social Security side, the payroll tax rate of 6.2% is slated to stay the same for 2020 as it was in 2019. However, there's a maximum amount of earnings on which this 6.2% tax gets imposed. For 2020, if you have earnings of more than $137,700, then you don't have to pay the Social Security portion of FICA once your employer has collected a total of $8,537.40. From a practical standpoint, that means that once your total pay for the year goes over $137,700, FICA tax will go down significantly, and your take-home pay will rise as a result.
The Medicare side of FICA works differently. The tax rate for Medicare is much lower, at just 1.45%. However, unlike Social Security, there's no earnings limit on how the federal government imposes that tax. Therefore, you can always expect to see at least some amount getting withheld on the FICA line, even after the Social Security portion goes to zero due to high earnings.
What if you're self-employed?
Self-employed workers don't have money withheld from paychecks, so they don't end up paying FICA tax per se. However, the self-employment tax ensures that these workers end up making the same payments to fund federal programs.
In fact, one thing that surprises many self-employed workers is that their obligations to pay Social Security and Medicare payroll taxes are essentially double what FICA takes out of employee paychecks. That's because employers also pay identical 6.2% and 1.45% taxes on earnings to Social Security and Medicare respectively, matching the employee share. Self-employed workers are responsible for both halves.
How FICA taxes might change
The only boosts to FICA taxes recently have come from the rising wage base on which Social Security payroll taxes get imposed. However, some lawmakers are looking at more dramatic changes.
For instance, presidential candidate Sen. Bernie Sanders (I-Vt.) would extend the Social Security portion of FICA to earnings above $250,000. Sanders suggests keeping the existing 6.2% rate for the Social Security tax, essentially reimposing the total 7.65% in FICA for high-income earners.
Presidential candidate Sen. Elizabeth Warren (D-Mass.) would go a step further, proposing a new payroll tax on wages above $250,000. The rate on that tax would be 7.4%, with a matching 7.4% obligation for employers. Such a move could increase FICA withholding for high-income individuals by an even greater amount than the Sanders proposal, and it would add a progressive element to the FICA tax structure for the first time.
Keep FICA on your radar
With control of Washington divided, it's unlikely that any of these proposals will actually become law before the end of 2020. However, it's still important to understand exactly where your tax dollars are going, so that you can put proposals considering changes to FICA into the proper context.
