FICA for Wage and Salary Employees
If you get a paycheck from an employer, then your FICA contribution is automatically withheld from every check. If you do the math, you will see that you pay 7.65 percent of your taxable earnings to FICA [source: Social Security Administration]. Interestingly, that is only half of the 15.3 percent in FICA contributions you owe to the federal government. Your employer is obligated to pay the other 7.65 percent for you. Isn't that nice of your corporate overlord? If you're high school or college student who also works for your school part-time, your wages are exempt from FICA taxes.
The 7.65 percent of your salary that you pay each month is earmarked for three different trust funds: two Social Security funds and one Medicare fund. Let's break down the FICA contribution into its three component parts:
- Old-Age and Survivors Insurance (OASI) – This Social Security trust fund pays benefits to retired workers and their families or the surviving family members of retired workers [source: Social Security Administration]. Exactly 5.3 percent of your salary is deposited in this fund.
- Disability Insurance (DI) – This separate Social Security trust fund pays benefits to disabled workers and their families [source: Social Security Administration]. These are people who can't work because of a serious injury or permanent disability. Exactly 0.9 percent of your salary is deposited in this fund.
- Hospital Insurance (HI) – This Medicare trust fund pays for Medicare Part A benefits, including inpatient hospital care, skilled nursing facility care, home health care and hospice care [source: Medicare.gov]. The fund also helps cover Medicare administrative costs. Exactly 1.45 percent of your salary goes into this trust fund.
Note that these rates were slightly lower for 2011 earnings.
The good news is that there is a limit to how much income can be taxed by the two Social Security trust funds. For 2012 earnings, that limit is $110,000 [source: Social Security Administration]. That means that only the first $110,000 of your income can be taxed the 6.2 percent that is earmarked for the OASI and DI trust funds. There is no limit, however, for Medicare, so you will always owe 1.45 percent for the HI trust fund.
Self-employed workers don't have the benefit of an employer who covers the other half of their FICA contributions, but they do get to deduct a portion of their payroll taxes. We'll talk more about it on the next page.