What Is the Federal Insurance Contributions Act (FICA)?
The Federal Insurance Contributions Act (FICA) of 1935 established a payroll tax on U.S. wage earners' paychecks and called for matching contributions from employers. The revenues from this tax finance the nation's Social Security program and Medicare program.
From the beginning, the idea behind the act was that working people would contribute a certain amount of each of their paychecks throughout their working years to fund Social Security (and later Medicare) so that, later in life, they'd be able to count on earned financial and health benefits.
The Self-Employment Contributions Act (SECA) of 1954 requires the self-employed to pay taxes on their net earnings to help fund Social Security and Medicare.
Key Takeaways
- Individuals' FICA contributions pay current benefits and build future ones that will be owed to them.
- FICA contributions are withheld from a wage earner's gross pay; the amount withheld depends on gross wages.
- Employers match the FICA taxes paid by their employees.
- Wage earners cannot opt out of payingFICA taxes.
- Since the 1930s, FICA has funded Social Security programs that provide benefits to retirees, children and surviving spouses, and the disabled.
Understanding FICA
History
In 1935, the United States Congress passed the Federal Insurance Contributions Act, known as FICA. Its purpose was to collect contributions to fund the new Social Security program established by the administration of President Franklin D. Roosevelt in the same year.
Roosevelt believed that the money collected from all working Americans through FICA would belong directly to them. He didn't want the financial benefits for their retirement, disability, or death to depend on federal revenue. He feared that politicians would take and use the money for their own purposes.
In 1965, the payroll tax to fund health care benefits was added when Medicare was signed into law by President Lyndon B. Johnson.
FICA contributions are mandatory. Although the rate can be set annually, it has remained mostly stable since 1990. The limit changes each year based on the National Average Wage Index.
Rates and Limits
According to the Internal Revenue Service (IRS), FICA taxes are made up of old-age, survivors, and disability insurance taxes (Social Security) plus the hospital insurance tax (Medicare). Each applies different rates.
There's a maximum wage base for Social Security taxes on earnings, above which no tax is levied. The wage base is set at $160,200 for 2023 and $168,600 for 2024.
There is no wage base limit for Medicare taxes.
For 2023 and 2024, the total Social Security tax rate of 12.4% is split between employee and employer. The employee pays 6.2% and the employer pays the other 6.2%.
The total Medicare tax rate of 2.9% is also split between employee and employer. The employee pays 1.45% and the employer pays 1.45%.
Employees pay an additional 0.9% Medicare tax on wages over a threshold amount. For 2023 and 2024, that amount is $200,000 for individuals ($250,000 for married couples filing jointly). So, depending on their wages, an employee's total Medicare tax could reach 2.35% (1.45% plus 0.9%). Employers are not required to match the additional Medicare tax.
The Self-Employed Contributions Act (SECA)
Under SECA, the self-employed pay both the employee and employer portions of the Social Security and Medicare taxes. For example, as a sole proprietor, you'd be responsible for paying 12.4% of your income toward Social Security and 2.9% toward Medicare.
Moreover, you'd pay the additional Medicare tax of 0.9% on self-employment income over the threshold amount.
Though they pay more than wage earners, self-employed individuals do get a tax break. They can deduct the amount that represents the employer's share (half) as a business expense.
FICA and SECA taxes do not fund Supplemental Security Income (SSI) benefits, even though that particular program is run by theSocial Security Administration(SSA). SSI benefits come out of general tax revenues.
How to Calculate FICA
Example 1
An employee earning $50,000 will pay $3,825 in FICA contributions in 2023. That breaks down to $3,100 in Social Security tax and $725 in Medicare tax. The wage earner's employer would pay the same amount.
How it's calculated:
Social Security tax = $50,000 x .062 (the employee rate of 6.2%) = $3,100
Medicare tax = $50,000 x .0145 (the employee rate of 1.45%) = $725
Total FICA = $3,825 ($3,100 + $725)
Example 2
An employee earning $250,000 and filing singly will pay $13,282.40 in FICA contributions in 2023. That breaks down to $9,932.40 in Social Security tax and $3,350 in Medicare tax. The wage earner's employer would pay slightly less because they aren't required to pay the additional Medicare tax of 0.9% on the $50,000 above the $200,000 threshold.
How it's calculated:
Social Security tax = $160,200 (wage base limit) x .062 (the employee rate of 6.2%) = $9,932.40
Medicare tax = $200,000 x .0145 (the employee rate of 1.45%) = $2,900
Additional Medicare tax = $50,000 x .009 (the total rate of 0.9%) = $450
Total Medicare taxes = $3,350 ($2,900 + $450)
Total FICA = $13,282.40 ($9,932.40 + $3,350)
Special Considerations
According to the Congressional Budget Office, it's estimated that the Social Security Trust Fund will run out of the money needed to make monthly Social Security payments in 2033. This would occur because revenues received into the program will not be enough to cover payments from it.
That imbalance will be due to the growing population of recipients of Social Security benefits and a shrinking workforce that's needed to fund the program with FICA taxes.
Policy makers are considering a variety of actions that could rectify this situation. These include raising the full retirement age (currently age 67), decreasing the financial benefits received, in particular by high earners, and increasing the payroll tax rate.
Do I Have to Pay FICA?
Yes. The Federal Insurance Contributions Act, or FICA, requires that wage earners contribute a portion of their earnings to fund the Social Security and Medicare programs. Ultimately, you'll be entitled to what's referred to as earned benefits. You paid for them and they're owed to you.
Is Social Security the Same As FICA?
No, but it's related to it. FICA is an acronym that stands for an act passed by the U.S. Congress back in 1935 at about the time Social Security was established. This Federal Insurance Contributions Act called for all working people in the U.S. to fund Social Security so that it could provide them with financial benefits later in life. The dollar amounts on your paycheck labeled as FICA are the payroll taxes contributed to Social Security, and since 1965, Medicare.
What Is the FICA Tax Rate?
Wage earners pay 6.2% on income of $160,200 ($168,600 in 2024) or less toward Social Security. Their employers also pay 6.2% on their behalf. So the total tax rate for Social Security is 12.4%. Any income above that threshold is not taxed for Social Security purposes. The Medicare rate of 1.45% is paid by wage earners on income currently up to $200,000 for individuals. For income above that, they pay an additional Medicare tax of 0.9%. Employers match the 1.45% rate but are not responsible for matching the 0.9% rate.
The Bottom Line
FICA refers to the 1935 U.S. law and later the 1965 law that mandated that payroll taxes be paid by workers and employers to fund the nation's Social Security and Medicare programs. FICA taxes are mandatory.
From then until now, American wage earners have had a portion of every paycheck withheld throughout their working years so that they can receive financial benefits from the government in their retirement years.
I've delved extensively into the Federal Insurance Contributions Act (FICA) and its intricate implications. FICA, established in 1935, instituted a vital payroll tax on U.S. wage earners to fund the country's Social Security and Medicare programs. Here’s a breakdown of the concepts:
Federal Insurance Contributions Act (FICA):
- Purpose: Created to collect contributions for Social Security (1935) and later Medicare (1965).
- Mandatory Contributions: Both employees and employers are mandated to contribute.
- Funding Social Programs: Intended for retirees, disabled individuals, surviving spouses, and children.
- SECA: Self-Employment Contributions Act, requiring self-employed individuals to pay taxes for Social Security and Medicare.
Rates and Limits:
- Social Security Tax: Fixed at 6.2% for employees and employers up to a certain income threshold ($160,200 in 2023).
- Medicare Tax: Set at 1.45% for both employees and employers, without an income cap. Additional Medicare tax of 0.9% applies to incomes over $200,000.
- SECA: Self-employed individuals pay both portions—12.4% for Social Security and 2.9% for Medicare.
Calculation Examples:
- Employee earning $50,000: Pays $3,825 in FICA (Social Security tax of $3,100 and Medicare tax of $725).
- Employee earning $250,000: Pays $13,282.40 in FICA (with adjustments for thresholds and additional Medicare tax).
Special Considerations:
- Social Security Trust Fund: Estimated to face insolvency by 2033 due to demographic shifts and funding imbalances.
- Policy Options: Possible solutions include raising retirement age, altering benefit structures, or adjusting payroll tax rates.
FICA Mandate and Clarifications:
- Mandatory Contributions: Wage earners cannot opt out of paying FICA taxes.
- Relation to Social Security: FICA funds Social Security and Medicare; the amounts labeled FICA on paychecks are payroll taxes for these programs.
- Tax Rates: Employees pay 6.2% for Social Security and 1.45% for Medicare, with variations based on income thresholds.
Conclusion:
FICA, a pivotal legislation, obligates both employees and employers to contribute to Social Security and Medicare. These contributions, withheld from paychecks, aim to ensure financial benefits for individuals in their later years. Understanding its nuances, calculations, and implications is crucial in comprehending its impact on both present and future generations.
