FICA is the acronym for Federal Insurance Contributions Act. The acronym is often used in the US when referring to the combination of the Social Security tax and the Medicare tax.
Generally, all of an employee's earnings which are less than $117,000 in the calendar year 2014 are subject to payroll withholdings of 6.2% for the Social Security tax plus 1.45% for the Medicare tax. In addition, the employer is required to pay a similar amount. The result is that the employer must remit 15.3% (6.2% + 6.2% + 1.45% + 1.45%) of each employee's wages or salaries that are less than $117,000 in a year.
A self-employed person must pay both the employee portion and the employer portion of the FICA tax.
There are specific rates that apply to an employee's annual earnings in excess of the FICA wage limit ($117,000 in 2014).
Effective in 2013, the Additional Medicare Tax of 0.9% applies to earned income of more than $200,000 ($250,000 for married couples filing jointly). Employers withhold this tax on wages in excess of $200,000 regardless of an employee’s filing status.
The Additional Medicare Tax raised an individual wage earner’s portion on compensation above the threshold amounts to 2.35 percent from 1.45 percent; the employer-paid portion of the Medicare tax on these amounts remained at 1.45 percent.
Net Investment Income Tax
Net Investment Income Tax is separate from the new Additional Medicare Tax, which also went into effect on January 1, 2013. You may be subject to both taxes, but not on the same type of income. The 0.9% Additional Medicare Tax applies to individuals’ wages, compensation, and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income.In general, net investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.
Net investment income generally does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income.
Additionally, net investment income does not include any gain on the sale of a personal residence that is excluded from gross income for regular income tax purposes. To the extent the gain is excluded from gross income for regular income tax purposes, it is not subject to the Net Investment Income Tax.
If an individual has too little withholding or fails to pay enough quarterly estimated taxes to also cover the Net Investment Income Tax, the individual may be subject to an estimated tax penalty.
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