FICA stands for the Federal Insurance Contributions Act.  It is a federal employment tax paid by both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, the disabled, and children of deceased workers.

Social Security benefits include old-age, survivors, and disability insurance. Medicare provides hospital insurance benefits. The amount that a person pays in taxes throughout that person’s working career is indirectly tied to the social security benefits annuity received as a retiree.

Currently FICA tax is 15.3%: 12.4% of earned income, up to an annual limit, paid into Social Security, and an additional 2.9% paid into Medicare.  The 2010 limit on Social Security is $106,800. There are no earned income limits on Medicare taxes.

If you’re a wage or salaried employee, you pay only half the FICA bill (6.2% for Social Security plus 1.45% for Medicare), and the tax is automatically withheld. Your employer contributes the other half. For most people that means 7.65% of their paycheck is withheld and their company pays another 7.65% on their behalf.

If you’re self-employed, however, you will pay both the employee and the employer share of FICA. You are, however, permitted to deduct half of this self-employment tax as a business expense.

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