You may be wondering, what is FICA? FICA stands for the Federal Insurance Contributions Act and is a United States federal payroll tax used to fund Social Security and Medicare. This tax is deducted from each paycheck you receive and deducts contributions from employers. For those who are self-employed, there is an equivalent law known as the Self-Employed Contributions Act. Under FICA, there is a Medicare tax and a Social Security tax which both add up to a FICA tax of 6.2% on your earnings. For the Social Security tax, there are certain years when there are changes to the total tax amount to adjust the Social Security benefits for inflation. In 2020, the wage cap amount for the Social Security tax rate was $137,700. For 2021, this wage cap has increased, so you may be paying more tax this year.
What Is the FICA Tax Rate For 2021?
There are two tax rates that apply to FICA. There is the Social Security tax and the Medicare tax. Currently, for single filers, there is a 1.45% Medicare tax on the first $200,000 of earnings and an additional .9% Medicare Tax on any earnings over $200,000 for a total 2.35% Medicare tax for people earning over $200,000. For joint returns, the Medicare tax rate of 1.45% is on the first $250,000, while the additional .9% tax is also applied to earnings over $250,000.
The current Social Security tax rate is 6.2% for both the employer and the employee. However, there is a wage cap amount, and any income earned above this amount is not subject to the Social Security payroll tax of 6.2%. The current wage cap amount for 2021 is $142,800. For example, if you earn $200,000 a year, you will be paying a 6.2% Social Security tax on $142,800 because that is the wage cap limit. On the other hand, if you earn $140,000 a year, you will be paying a 6.2% Social Security tax on $140,000. Therefore, the new Social Security cap limit for 2021 may have a more significant impact for those earning close to but less than the wage cap limit of $142,800.
Here’s a more in-depth example using the numbers from above: Person 1 earns $200,000 a year, and Person 2 earns $140,000. Person 1 will be paying $8,853.60 in Social Security taxes ($142,800, the wage cap limit, multiplied by 6.2%). Person 2 will be paying $8,680 in Social Security taxes because they are earning less than the wage cap limit ($140,000, their salary, multiplied by 6.2%). Therefore, Person 1, who earns $60,000 more than Person 2, is paying only $173.60 more in Social Security tax.