FICA is a US federal payroll tax. It stands for the Federal Insurance Contributions Act and is ultimately deducted from the paycheck for every person who has signed up for the Social Security program from the Social Security Administration.
FICA is not the virtual piggy bank that every payer will have access to when they retire. Instead, it is an established system of getting Social Security taxes for people earning above the threshold income determined by their AIME scores and annual gross incomes. The money you pay in FICA taxes is not held in a personal account for you to use when you get benefits. In fact, it is a system where today's workers are helping to pay for disability benefits (SSDI) and supplemental income (SSI) for retirees and disabled claimants of the Social Security benefits. Also, any unused money paid in FICA today and those amounts paid by the future workers go to the Social Security funds to help secure today and tomorrow for the disabled workers who get unable to work under substantial gainful activity due to a condition at any time of their lives.
How does FICA work for SSDI?
The nine digit number assigned by the Social Security Administration helps you record your covered wages or self-employment. So, as a person works and earns a substantial income, pays the FICA tax on his income, they earn work credits for every $1410 earned, with a maximum of 4 work credits earnable each year.
How much FICA taxes do I have to pay in 2021?
One frequently asked question by workers who are aiming to apply for Social Security or getting ready to become eligible for Social Security benefits in the near future, is that how much of their paychecks would go to the Social Security taxes. The answer, however, is more complicated than expected.
As much as it may sound counterintuitive to believe, the truth is that the Congress had decided to increase the FICA payroll taxes for employers who are already burdened due to the Covid-19 pandemic and its toll on the economy. As a result, the employers will have to pay a 6.2% of their payrolls to the Social Security system. However, this is not all. Starting Jan 01' 2021, the maximum taxable earnings subject to the SSA's payroll taxes will also increase from $137,700 (in 2020) to $142,800 (in 2021) – an increase of %5,100. Take a look at the fact sheet provided by the SSA summarizing the FICA and payroll tax changes for 2021. The idea of these changes was to make sure the most vulnerable class of the beneficiaries do not suffer from the immediate changes in the consumer price index due to the economic situation.
The SSA also announced an increase of 1.3% in disability benefits to approximately 70 million Americans on disability paychecks (taking effect from Jan 2021). This taxable income is determined by the monthly threshold also called as substantial income which is adjusted with the Social Security's Cost-of-Living-Adjustment (COLA) program keeping in mind the changes in the consumer price index each year. For 2020, the substantial income was considered as $1260 a month for non-blind and $1480 a month for blind beneficiaries.
FICA Tax Rates for 2020 and 2021
The Medicare, SSI and SSDI taxes are all paid through the same platform to the Social Security Fund as the Federal Insurance Contribution Act (FICA). FICA tax rates are statutorily set and can only be changed through the new tax law. So, the workers are required to pay a 6.2% amount from their payroll checks directly to the Social Security. Mostly, it is deducted by the employers and sent to the SSA with an additional 7.65% paid by the employer to their worker's Social Security system. This makes a total withholding rate of 15.3% for the year 2020 and 15.3% 2021 for the FICA taxes. For 2021, the FICA tax rate will remain as 6.2% for the workers, however, the employer will have to match the additional amount for the payroll taxes for a total of 15.3% for FICA taxes.
In addition to the above, worker's are required to pay an additional 1.45% in Medicare taxes – however, the threshold for annual income for the Medicare FICA taxes are calculated a bit differently than the Social Security FICA taxes. These additional taxes have to be paid only by highly compensate employees according to the following criteria:
- - $250,000 for married taxpayers who file for FICA taxes jointly;
- - $125,000 for married taxpayers who file for FICA taxes separately;
- - $200,000 for single and all other taxpayers;
These wage thresholds, set by law, do not adjust for inflation and therefore apply to more employees each year.
For more information on Social Security taxes, please consult our professional social security attorneys for legal guidance.