The Federal Insurance Contributions Act (FICA) is a U.S. law enacted in 1935 that mandates a payroll tax on the paychecks of employees, with matching contributions from employers. The money collected through FICA is used to fund the Social Security and Medicare programs, which provide financial and health benefits to retirees, disabled individuals, children, surviving spouses, and others in need.
FICA taxes are handled by the Social Security Administration and are payroll withholdings that go toward Social Security and Medicare funds. For most individuals, half of their FICA taxes are paid by their employer, while the other half is deducted from their wages. However, self-employed individuals are responsible for paying the full amount of FICA taxes on their own, which is referred to as the "Self-Employment Tax."
Under FICA, a portion of employee compensation, up to a certain limit, is allocated toward Social Security. In 2016, this amount was set at 12.4% of employee compensation, up to $118,500. If you are not self-employed, your employer will cover half of this tax. The Medicare tax, on the other hand, is set at 2.9%, with half of it paid by the employer. However, individuals with higher incomes may be subject to an additional 0.9% Medicare tax if their income exceeds $200,000 (or $250,000 for married individuals filing jointly).
Self-employed individuals bear the full burden of the FICA taxes. They must pay the entire 12.4% Social Security tax themselves, in addition to the 2.9% Medicare tax. This combined tax is known as the Self-Employment Tax.
One of the advantages of FICA taxes is that they directly benefit the individuals paying them. By contributing to Social Security, individuals build a future stream of income that they can rely on in their retirement years. Medicare benefits are also available to everyone starting at age 65. This system ensures that individuals who have paid into these programs can access the benefits they deserve when they need them.
It is important to note that FICA contributions cannot be opted out of by wage earners. These taxes are withheld from a wage earner's gross pay, and the amount withheld depends on the individual's gross wages. Employers are required to match the FICA taxes paid by their employees, which further supports the funding of Social Security and Medicare programs.
The history of FICA dates back to its enactment in 1935 under President Franklin D. Roosevelt's administration. Roosevelt believed that the contributions collected through FICA should belong directly to the working Americans who paid them. He wanted to ensure that the financial benefits provided by Social Security and Medicare would not be dependent on federal revenue, fearing that politicians might divert the funds for other purposes.
The Federal Insurance Contributions Act (FICA) is a payroll tax system in the United States that funds the Social Security and Medicare programs. It requires employees and employers to contribute a portion of their earnings to support these programs. FICA taxes have direct benefits for individuals, providing them with income in retirement and access to healthcare through Medicare. By understanding FICA and its implications, individuals can better prepare for their financial well-being and ensure they can rely on these programs when they need them.
Summary:
FICA (Federal Insurance Contributions Act) taxes are handled by the Social Security Administration, as they are payroll withholdings that go toward Social Security and Medicare funds.
Most people will have half of their FICA paid by their employer, but self-employed people must pay it all on their own, which is called the “Self-Employment Tax.” FICA is a tax on employees and employers that funds the Social Security and Medicare programs of the United States.
12.4% of employee compensation (up to $118,500 in 2016) goes toward Social Security, with half of the tax paid by your employer if you are not self-employed.
The Medicare tax is 2.9%, with half of it being paid by an employer, but an additional 0.9% is due from people whose income is over $200,000 or $250,000, depending on whether they file as single or married. Self-employed people must pay the entire 12.4% social security tax themselves; when combined with the Medicare tax, this is known as the Self Employment Tax.
The nice thing about these taxes is that they have direct benefits to the citizen paying them, because everyone who paid in to social security will be able to draw an income from it at a certain age, and Medicare benefits are available to everyone at age 65.
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