EP 14: What is English for “FICA” Taxes?
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Translating financial and tax Legalese into English in 10 minutes or less. In today's episode, we'll explain payroll taxes.
We'll describe the what, the why, and, more importantly, what you need to know. We'll answer the question, "What are FICA taxes?".
We'll also discuss how these payroll taxes affect workers on nonimmigrant work visas. Depending on whether you are a nonresident for tax purposes, you may be exempt from FICA taxes.
We finally touch on totalization agreements for U.S. tax residents overseas.
The speakers' views and opinions discussed in this episode, should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Speaker 1 (00:06):
Welcome to the International Money Cafe Podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host, Jen Hams, certified financial planner, founder and owner of elgon Financial Advisors,
Speaker 2 (00:21):
And I'm your host, man Nadi, enrolled agent, owner and founder of Amman Tax and Business Services. Join us on this journey as we explore the unique challenges faced by inbound outbound families and businesses on taxes, compliance, and financial planning. Let's get to the show.
Speaker 1 (00:43):
We are back with another shorty episode where we take a time used in the cross-border finance and tax space and translate it into plain English in 10 minutes or less. Okay. Today we are going to talk about payroll taxes. So Manasa, is your coffee ready? I think we are going to need it for this one.
Payroll Taxes
Speaker 2 (01:05):
Absolutely. Absolutely Jane. So what are payroll taxes? Payroll taxes are basically FICA taxes paid by both the employer and the employee, and that's 6.2% for social security and 1.45% for Medicare paid by the employer and the employee each. Basically, these are government programs designed for retirement and you pay into these programs through these taxes. The employers just like I said, match the FICA taxes paid by the employees, by withholding them from the employee's gross pay, and then remedying it to the government at a certain cadence. Wage earns cannot opt out of paying FICA taxes, so this is not a choice. It's mandatory, not just employees. Self-employed persons in the US also pay into fica. They are considered to be both the employer and the employee for this purpose, and they have to pay both the share of the employee and the employer along with their federal taxes when they file their tax return.
History of Federal Insurance Contributions Act
That's a little bit about what payroll taxes are and if you are curious, A quick history about FICA is that FICA stands for the Federal Insurance Contributions Act, and that was enacted in 1935, so it's been around for quite a long time. It was part of President FDRs new deal and it was designed to provide financial aid for the elderly and the disabled. That's a little bit about fica. Jane, what do you think? Do you want to talk about how this affects workers on non-immigrant status?
Speaker 1 (03:13):
Yes.
Speaker 2 (03:14):
Or non-immigrant visas, I'm sorry.
What is this FICA on My Pay Stub?
Speaker 1 (03:16):
Non-immigrant visas? Absolutely. If you're on a non-immigrant work visa and we know which ones those are, you want most likely a US tax resident. In that case, yes, you do pay FICA taxes and I've had folks sometimes reach out and say, oh, what the heck is this fica? What is this FICA on my pay stub? Now you know what it is, and yes, you do pay your FICA taxes if filing as a US tax non-resident, you don't pay the FICA taxes because if you think about it by default, this is money that would actually help you or money you'd use in your retirement, and by the nature of it being a non-immigrant visa, especially the one that I'm going to mention shortly, the assumption is you are not going to be here when you retire. So if for example, you're on the F1 visa and it's your five calendar years, the government expects that you will be going home at some point. You don't pay FCA taxes on this. Now, if you are a US tax resident abroad, this means you are either a citizen or green card holder and you have income from self-employment, you do pay the FICA taxes. Anything else you want to add to this manasa?
Speaker 2 (04:43):
Yes, definitely. Speaking of US citizens and green card holders abroad who may have self-employment income, remember that there are countries that have what are totalization agreements with the us? The totalization agreements basically are like the income tax treaty except that they cover only the social security part of the taxes. If you live and you work in a country where you have these self-employment taxes or you are paying to that government social security taxes, then please look into whether that country has a totalization agreement with the United States and whether those credits can be banked into your US Social Security. Yeah, I guess that brings us to the close of another shorty episode today and your listener. If you like this content and if you like what we are doing with the SHORTY episodes or even with the long ones, please write to us and let us know what else you would like us to talk about. The website is the i am cafe.com and please share like and subscribe to our episodes on whichever platform you listen to podcasts. Thank you.
Speaker 3 (06:04):
Bye. Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only and should not be used as a substitute for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross order finances and tax needs.