Federal Insurance Contributions Act (FICA): What It Is, Who Pays

Overview of FICA

• Established: 1935
• Purpose: Payroll tax for Social Security and Medicare
• Who Pays: Both employees and employers contribute

Key Takeaways

• FICA contributions help fund current and future Social Security and Medicare benefits.
• Contributions are mandatory for wage earners and are deducted from gross pay.
• Employers must match the employee's FICA contributions.

Historical Background

• 1935: FICA was introduced alongside the Social Security program under President Franklin D. Roosevelt.
• 1965: Medicare tax added under President Lyndon B. Johnson.
• Contributions rates have remained relatively stable since 1990.

Rates and Limits

• Social Security Tax: 12.4% total, split between employee and employer (6.2% each).
• Medicare Tax: 2.9% total, split between employee and employer (1.45% each).
• Additional Medicare Tax: 0.9% on wages above $200,000 for individuals ($250,000 for couples).
• Wage Base Limit: $160,200 for 2023, $168,600 for 2024 (applies only to Social Security tax).

SECA for Self-Employed

• Self-employed individuals pay both sides of the tax (Social Security 12.4%, Medicare 2.9%).
• Eligible to deduct the employer-equivalent portion as a business expense.

Calculating FICA Contributions

• Example for $50,000 salary:
  • Social Security: $3,100 (6.2%)
  • Medicare: $725 (1.45%)
• Example for $250,000 salary:
  • Social Security: $10,453.20 (6.2% up to wage base)
  • Medicare: $3,625 (1.45%)
  • Additional Medicare: $450 (0.9% on earnings over threshold)

Special Considerations

• Social Security Trust Fund predicted to run out by 2033 without reforms due to demographic shifts.
• Potential solutions: increase retirement age, adjust benefits, increase payroll tax rate.

FAQs

• Mandatory Contribution: Yes, FICA contributions are obligatory.
• Relation to Social Security: Not the same, but FICA funds Social Security.
• FICA Tax Rates: 6.2% for Social Security (up to wage base), 1.45% for Medicare, plus additional 0.9% for high earners.

Conclusion

• FICA taxes are crucial for funding Social Security and Medicare, ensuring benefits for Americans in retirement.
• Contributions are non-optional, deducted from every paycheck, and matched by employers.