What Is the Federal Insurance Contributions Act (FICA)?

What Is the Federal Insurance Contributions Act (FICA)?

Let me explain FICA directly: The Federal Insurance Contributions Act, enacted in 1935, requires both U.S. wage earners and their employers to contribute a portion of earnings to fund Social Security and Medicare. These contributions secure financial and health benefits for your retirement years.

If you're self-employed, you must contribute under the Self-Employment Contributions Act (SECA) of 1954, which means paying both the employee and employer portions. FICA forms a core part of the U.S. social safety net, providing stability and support for future generations.

Key Takeaways

Understand this: FICA is a mandatory payroll tax funding Social Security and Medicare, impacting every U.S. wage earner and their employers. For 2024, it includes a 6.2% Social Security tax on wages up to $168,600 and a 1.45% Medicare tax on all income, plus an extra 0.9% Medicare tax for singles earning over $200,000.

Self-employed people pay both shares under SECA, totaling 15.3% for Social Security and Medicare. Note that Supplemental Security Income (SSI) is funded by general taxes, not FICA or SECA. With the Social Security Trust Fund expected to deplete by 2033, options like raising the retirement age, cutting benefits, or increasing taxes are under consideration.

How FICA Tax Impacts Your Paycheck

You see FICA's effect right on your paycheck. It's the deduction that goes toward Social Security and Medicare, split between you and your employer.

The Evolution of FICA: From Social Security to Medicare

Congress passed FICA in 1935 to fund the new Social Security program under President Franklin D. Roosevelt. Roosevelt intended these contributions from working Americans to be their own money, not reliant on federal revenue, to prevent politicians from misusing it for retirement, disability, or death benefits.

In 1965, President Lyndon B. Johnson added the payroll tax for Medicare health benefits. FICA contributions are mandatory, with rates mostly unchanged since 1990, though the wage limit adjusts yearly based on the National Average Wage Index.

Navigating FICA Rates and Limits for 2023 and 2024

Per the IRS, FICA covers Social Security taxes for old-age, survivors, and disability insurance, and Medicare taxes for hospital insurance, each with distinct rates. Social Security has a wage base limit: $160,200 for 2023 and $168,600 for 2024, above which no tax applies. Medicare has no such limit.

The total Social Security rate is 12.4%, split as 6.2% each for employee and employer. Medicare's total is 2.9%, split as 1.45% each. Employees pay an extra 0.9% Medicare tax on wages over $200,000 (or $250,000 for joint filers), making their rate up to 2.35%; employers don't match this additional amount.

What Self-Employed Individuals Need to Know About SECA

Under SECA, if you're self-employed, you pay both portions: 12.4% for Social Security and 2.9% for Medicare on your income, plus the extra 0.9% on amounts above the threshold. You get a deduction for half of this, representing the employer share, as a business expense.

Importantly, FICA and SECA don't fund SSI benefits, which come from general tax revenues despite being administered by the SSA.

Calculating Your FICA Contributions: Step-by-Step Guide

Take this example: An employee earning $50,000 pays $3,825 in FICA for 2024—$3,100 in Social Security (50,000 x 0.062) and $725 in Medicare (50,000 x 0.0145). The employer matches this.

Another case: A single filer earning $250,000 pays $14,528.20—$10,453.20 in Social Security (168,600 x 0.062), $3,625 in Medicare (250,000 x 0.0145), and $450 additional (50,000 x 0.009). The employer matches only the base Medicare, not the additional.

Special Considerations

The Congressional Budget Office projects the Social Security Trust Fund will exhaust funds for full payments by 2033 due to more recipients and fewer workers contributing via FICA. Policymakers are looking at raising the retirement age, reducing benefits for high earners, or increasing payroll taxes to address this.

Do I Have to Pay FICA?

Yes, you do. FICA requires wage earners to contribute to Social Security and Medicare, entitling you to earned benefits you've paid for.

Is Social Security the Same As FICA?

No, but they're linked. FICA is the 1935 act mandating contributions to fund Social Security benefits, and since 1965, Medicare too. Those paycheck deductions labeled FICA go toward these programs.

What Is the FICA Tax Rate?

You pay 6.2% on income up to $168,600 for Social Security in 2024, matched by your employer for a total 12.4%. For Medicare, it's 1.45% on all income, plus 0.9% on amounts over $200,000, which employers don't match.

The Bottom Line

FICA, from the 1935 and 1965 laws, mandates payroll taxes from workers and employers to fund Social Security and Medicare. You've had these deductions from every paycheck during your working years to secure government benefits in retirement.