What exactly is the Federal Insurance Contributions Act (FICA)?
Employers were required to match U.S. wage workers’ payroll taxes under the 1935 Federal Insurance Contributions Act (FICA). This tax funds Social Security and Medicare. The original plan was for working individuals to contribute a fixed amount of each paycheck to Social Security (and subsequently Medicare) to receive financial and health benefits in retirement. Self-employed people must pay taxes on their net earnings to finance Social Security and Medicare under the 1954 Self-Employment Contributions Act (SECA).
Understanding Federal Insurance Contributions Act (FICA)
History
Congress approved FICA in 1935. It was created to collect donations for President Franklin D. Roosevelt’s new Social Security program that year.
Roosevelt thought all working Americans’ FICA payments belonged to them. He didn’t want government revenue to fund their retirement, disability, or death benefits. He worried politicians would steal the money.
President Lyndon B. Johnson enacted Medicare in 1965 and added the payroll tax to support health care.
Mandatory FICA contributions: The rate can be set annually; however, it has been steady since 1990. This limit varies annually with the National Average Wage Index.
Limits and Rates
FICA taxes include Social Security, Medicare, and hospital insurance taxes, according to the IRS. Each charges differently.
Social Security taxes on wages stop at a specific pay base. The pay base is $160,200 in 2023 and $168,600 in 2024.
No wage restriction applies to Medicare taxes.
Employees and employers share the 12.4% Social Security tax rate in 2023 and 2024. The employer and employee each pay 6.2%.
The Medicare tax rate of 2.9% is split evenly between employees and employers. Both employees and employers contribute 1.45% of the total. When employees’ wages are over a certain level, they are subject to a 0.9% Medicare levy. In 2023 and 2024, this barrier is set at $200,000 for single filers and $250,000 for married couples filing jointly.
The total Medicare tax for an employee might be 2.35% (1.45% plus 0.9%), depending on their salary. Employers need not match Medicare’s increased tax.
Self-employed contributions act
Self-employed people pay employee and employer Social Security and Medicare taxes under SECA. As a sole owner, you’d pay 12.4% of your income to Social Security and 2.9% to Medicare.
You’d also pay a 0.9% Medicare tax on self-employment income exceeding the threshold.
Self-employed people get a tax advantage while paying more. They can deduct half of the employer’s portion as a business cost.
FICA Calculation
Example 1
An employee earning $50,000 in 2023 will pay $3,825 in FICA. That’s $3,100 in Social Security and $725 in Medicare. The worker’s employer would pay the same.
Method of calculation:
$50,000 x 6.2% employee Social Security tax = $3,100
Medicare tax = $50,000 x 1.45% employee rate = $725.
Total FICA: $3,825 ($3,100 + $725).
Example 2
Single $250,000 earners will pay $13,282.40 in FICA payments in 2023. Social Security and Medicare taxes total $9,932.40 and $3,350, respectively. The wage earner’s employer pays less since they don’t pay the 0.9% Medicare tax on $50,000 over $200,000.
Method of calculation:
Wage base limit = $160,200 x 6.2% employee rate = $9,932.40 for Social Security tax.
Medicare tax = $200,000 x 1.45% employee rate = $2,900
$450 = $50,000 x.009 (0.9%) additional Medicare tax.
Total Medicare taxes: $3,350 ($2,900 + $450).
Total FICA: $13,282.40 ($9,932.40 + $3,350).
Special Considerations
In 2033, the Congressional Budget Office predicts that the Social Security Trust Fund will run out of money to provide monthly benefits. This happens because program earnings won’t cover payments.
The expanding number of Social Security recipients and a dwindling workforce that pays FICA will cause that imbalance.
Policymakers are exploring many solutions. These include raising the full retirement age (now 67), reducing financial benefits, especially for wealthy workers, and hiking payroll taxes.
Is it necessary for me to pay the Federal Insurance Contributions Act (FICA)?
Yes. Wage earners must contribute to Social Security and Medicare under the Federal Insurance Contributions Act, or FICA. You own them since you paid for them.
Are Social Security and Federal Insurance Contributions (Act FICA) the same?
It links. Congress approved the Federal Insurance Contributions Act in 1935, the year Social Security was created. To receive retirement benefits, all US workers must pay into Social Security under the Federal Insurance Contributions Act. For Social Security and Medicare, FICA taxes have been deducted from your salary since 1965.
How much is the FICA tax?
Workers earning $160,200 ($168,600 in 2024) or less pay 6.2% for Social Security. Employers pay 6.2% for them. Social Security taxes total 12.4%. Social Security does not tax income over that amount. Individuals earning up to $200,000 pay 1.45% Medicare. They spend a 0.9% Medicare tax on income beyond that. Employers match 1.45% but not 0.9%.87
The Judgment
FICA was the 1935 and 1965 U.S. statute that required companies and workers to pay payroll taxes for Social Security and Medicare. Mandatory FICA taxes Since then, American wage earners have had a percentage of their paychecks withheld so they might receive government retirement benefits.
Conclusion
- FICA contributions fund present and future benefits.
- Gross earnings determine how much FICA is withheld.
- Employers match employee FICA taxes.
- Wage workers must pay FICA.
- Since the 1930s, FICA has paid Social Security benefits for retirees, children, surviving spouses, and people with disabilities.
