Federal Insurance Contributions Act (FICA)

Definition

The Federal Insurance Contributions Act (FICA) is a federal law that mandates a payroll tax on both employees and employers to fund the Social Security and Medicare programs, which provide benefits for retirees, disabled individuals, and children. Contributions are divided into two main components: Social Security (OASDI) and Medicare (Hospital Insurance).

Components of FICA:

1. Social Security Tax: Levied at a rate of 6.2% on wages, capped at a certain annual income threshold.
2. Medicare Tax: Levied at a rate of 1.45% on all wages, with no income cap.

Examples

1. Example 1 - Calculating FICA for an Average Earner:

   • If an individual earns $50,000 per year, they will contribute 6.2% towards Social Security ($3,100) and 1.45% towards Medicare ($725), for a total FICA contribution of $3,825.

2. Example 2 - High-Income Earner:

   • For an individual earning $150,000 annually, up to the 2023 cap of $160,200, they will contribute 6.2% for the first $160,200 towards Social Security (approximately $9,932), and 1.45% of the total $150,000 towards Medicare ($2,175).

Frequently Asked Questions

1. What is FICA used for?

   • FICA funds Social Security and Medicare programs which provide retirement income, disability income, and health care for the elderly.

2. Are both employees and employers required to pay FICA?

   • Yes, both employees and employers equally share the cost of FICA. Employers match the 6.2% for Social Security and 1.45% for Medicare contributions made by employees.

3. Is there a cap on FICA taxes?

   • Yes, the Social Security portion is capped at a certain income level which is adjusted annually, but the Medicare portion has no cap.

4. How do FICA contributions affect my paycheck?

   • FICA deductions are taken directly from your paycheck, reducing your net income.

5. Can self-employed individuals be exempt from FICA?

   • No, self-employed individuals pay a similar tax called SECA (Self-Employment Contributions Act) which accounts for both the employee and employer portions of FICA.

Related Terms

• Social Security Act of 1935: The original act that established Social Security, providing financial assistance to senior citizens and setting the stage for Medicare.
• Medicare: A federal program providing healthcare for individuals aged 65 or older and for certain younger people with disabilities.
• Payroll Tax: Taxes employers withhold from employees’ wages and pay on their behalf for Social Security and Medicare.

Online References

• Social Security Administration (SSA)
• Medicare
• Internal Revenue Service (IRS) Payroll Taxes

Suggested Books for Further Studies

1. “Social Security and Medicare: A Policy Primer” by Alan S. Blinder & Janet L. Yellen
2. “The Guidebook to Social Security Benefits” by Social Security Administration
3. “Essentials of Payroll: Management and Accounting” by Steven M. Bragg

Fundamentals of FICA: Taxation Basics Quiz

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