FICA

FICA stands for the Federal Insurance Contributions Act, which is the title of Chapter 21 of the Internal Revenue Code. That chapter imposes the payroll taxes that fund Social Security and Medicare, so the FICA line on a paystub is shorthand for the Social Security tax and the Medicare tax taken together. Chapter 21 is organized into four subchapters, and their headings do most of the explaining: Subchapter A, "Tax on Employees," at sections 3101 to 3102; Subchapter B, "Tax on Employers," at sections 3111 to 3113; Subchapter C, "General Provisions," at sections 3121 to 3128, which is where wages and employment are defined; and Subchapter D, "Credits," at sections 3131 to 3134.

Two naming points are worth settling. FICA is not a third tax alongside Social Security tax and Medicare tax; it is the law that imposes both of them. And FICA is narrower than payroll taxes, which is the broader category that also takes in federal income tax withholding and the unemployment taxes an employer pays on its own account under separate chapters.

It is two taxes, and the "employer match" is arithmetic rather than statute. Section 3101(a) provides that "there is hereby imposed on the income of every individual a tax equal to 6.2 percent of the wages," and 3101(b)(1) adds 1.45 percent for Medicare. Section 3111(a) then provides, separately, that "there is hereby imposed on every employer an excise tax, with respect to having individuals in his employ, equal to 6.2 percent of the wages ... paid by the employer," with 3111(b) adding the same 1.45 percent. So the employee's liability is a tax on the individual's income and the employer's is an excise tax on the act of employing someone. They land on different taxpayers, they are different kinds of tax, and they are equal in amount by design rather than because one is a share of the other. The distinction stops being academic the moment the two diverge, which they do for the additional Medicare tax.

The additional Medicare tax has no employer half. Section 3101(b)(2) imposes a further 0.9 percent on wages above $250,000 on a joint return, $125,000 for a married person filing separately, and $200,000 in any other case. It sits in Subchapter A, the employee chapter, and section 3111 contains no matching provision. Those thresholds are statutory and are not adjusted for inflation.

The employer collects the employee's tax and is on the hook for it. Section 3102(a) provides that "the tax imposed by section 3101 shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid." Section 3102(b), headed "Indemnification of employer," then provides that every employer required to deduct the tax "shall be liable for the payment of such tax, and shall be indemnified against the claims and demands of any person for the amount of any such payment." So once the tax has been withheld, the obligation to hand it over is the employer's rather than the employee's, which is also why unpaid withholding is one of the exposures a business entity does not shield its responsible people from.

"Contributions" is a misnomer with a history. The chapter is titled Federal Insurance Contributions Act, and the word contributions carries an implication of a premium paid into an account. Neither operative section supports it. Section 3101 and section 3111 both say "there is hereby imposed ... a tax," the money is collected through the tax system, and what the payments buy is a statutory earnings record rather than a contractual claim on a fund. The insurance framing is real in the sense that the programs pay on events, retirement, disability and death among them, but the payment mechanism is taxation.

What FICA is not. It does not include income tax withholding, which comes from Chapter 24 and is the employee's own income tax paid in installments. It does not include federal or state unemployment tax, which the employer owes on its own account. And it does not apply to a self-employed person, who instead pays self-employment tax under a different chapter, computed differently but funding the same two programs.

For an employee the mechanism runs every pay period without anyone doing anything.

1. The employer identifies wages as Chapter 21 defines them in section 3121, which is not the same as gross pay and not the same as the wage figure used for income tax. Section 3121(a) carries its own list of exclusions, including amounts taken under a cafeteria plan within the meaning of section 125. It also runs the other way: section 3121(v)(1) provides that nothing in subsection (a) excludes an employer contribution under a qualified cash or deferred arrangement from wages, so a traditional 401(k) deferral reduces the income tax wage figure while remaining fully subject to FICA. That is why the Social Security and Medicare wage boxes on a Form W-2 frequently do not match the income tax wage box on the same form, in either direction, and why the gap is worth reading rather than assuming an error.

2. It withholds the employee's tax under section 3101 and section 3102, 6.2 percent for Social Security until the year's ceiling is reached and 1.45 percent for Medicare with no ceiling, plus the 0.9 percent additional Medicare tax once that employer has paid the employee more than $200,000 in the year.

3. It owes its own tax under section 3111 at 6.2 percent and 1.45 percent, which never appears on the employee's paystub.

4. It deposits both and reports them, generally on Form 941 each quarter, and reports the year's totals to the employee and to the Social Security Administration on Form W-2.

A hypothetical example of the full cost of a pay period. Marisol is paid $4,000 twice a month and is nowhere near the Social Security ceiling. Her employer withholds 6.2% of $4,000, which is $248, and 1.45%, which is $58, so $306 leaves her paycheck as FICA, exactly 7.65%. Her employer then owes its own $248 and $58 under section 3111, another $306 that she never sees. The government collects $612 on that $4,000 of wages, which is 15.3% of it, and only half of that appears anywhere on her paystub.

What the design achieves

• Collection is automatic and continuous, so coverage is built without the worker having to remember to fund it.
• The taxes are earmarked to two specific programs and paying them is what creates the earnings record those programs pay out against.
• Flat rates on wages make the amount predictable in a way graduated income tax is not.
• Because the employer collects, deposits and reports the employee's tax and section 3102(b) makes the employer liable for paying it over, the risk of a default sits with the employer rather than with the employee it was withheld from.

The honest criticisms

• It applies from the first dollar of wages with no standard deduction equivalent, so it falls hardest as a share of income on the lowest earners.
• Because the Social Security half stops at a ceiling, the combined rate falls once a high earner passes it, which is the opposite of how income tax behaves.
• The employer's own tax is invisible on a paystub, so the true tax on a job is routinely understated by workers looking only at what was deducted.
• The word contributions invites the belief that the payments are premiums buying a contractual entitlement, which is not what the statute does.
• Because the additional Medicare tax is withheld on one employer's wages but owed on household income, a two-earner couple can owe it with nothing withheld and discover the shortfall at filing.