In spite of the fact that tax season has arrived, the process need not be intimidating. Beginning with FICA, we’ll explain the tax filing lingo, paperwork, and due dates you’ll need to comprehend for the upcoming tax year, 2023. The FICA was first mandated by the Federal Insurance Contribution Act in the 1930s. and have been in use to finance Social Security and Medicare, two important components of the government’s social safety net, since the Great Depression. Ultimately, this means that while nobody enjoys paying taxes, with FICA you can rest assured that your payments will be repaid by the government in the form of retirement and healthcare benefits. You’re still unsure of how your taxes on Social Security and Medicare relate to you. Here\u2019s what to know about FICA Tax, who is exempt from paying these taxes, and how it differs from Federal Income Tax (FICA vs FIT)<\/p>\n\n\n\n
The Federal Insurance Contributions Act, also known as FICA, is a piece of federal legislation that mandates the deduction of three distinct categories of employment taxes from the wages of workers by their respective employers.<\/p>\n\n\n\n
In 1935, the United States government passed the Federal Insurance Contributions Act (FICA), which requires companies and workers to pay a payroll tax of 6.2% of each worker’s gross income. The funds that are collected are put toward supporting government programs such as Social Security and Medicare.<\/p>\n\n\n\n
From the inception, the act’s underlying premise was always that employees would set aside a portion of their wages during their working years to support Social Security (and eventually Medicare) so that they could rely on these programs in their retirement.<\/p>\n\n\n\n
This paycheck taxes amount to 15.3 percent, broken down as 12.4 percent in Social Security and 2.9 percent in Medicare. Also, for some high-income workers, an additional 0.9% Medicare surtax must be withheld by their employers.<\/p>\n\n\n\n
You may then wonder who is responsible for making FICA contributions. Basically, FICA taxes are paid in part by both employees and employers. Employers are responsible for withholding and remitting the employee and employer contributions to these taxes. These taxes are first paid over to the Federal Revenue Service, and then they are sent over to the Social Security Administration so that they can be used for payments for retirement and those who are receiving disability benefits. The Medicare tax also contributes to the federal government’s Medicare trust fund to cover medical costs for persons 65 and above and those with disabilities.<\/p>\n\n\n\n
The Federal Insurance Contributions Act (FICA) was enacted in 1935 by the United States Congress. Its goal was to amass funds for President Franklin D. Roosevelt’s new Social Security program that was launched that same year.<\/p>\n\n\n\n
Roosevelt thought that the FICA tax that workers pay should be compensation for the workers themselves. He didn’t want Social Security, Medicare, or any other federally funded program that provided for their retirement, disability, or death to be subject to budget cuts. He was basically worried that the politicians would steal the money for themselves.<\/p>\n\n\n\n
Medicare, signed into law by President Lyndon B. Johnson in 1965, included a new payroll tax that would be used to pay for health insurance and related services.<\/p>\n\n\n\n
Paying into FICA is generally mandatory. The rate is subject to change on a yearly basis, however, it has been relatively constant since 1990. In accordance with the Consumer Price Index, the cap usually sees an adjustment annually.<\/p>\n\n\n\n
The Federal Revenue Service (IRS) states that FICA taxes consist of the hospital insurance tax and the old-age, survivors, and disability insurance taxes (Social Security) (Medicare). Every one of these operates at a distinct pace and rate.<\/p>\n\n\n\n
If your salary is above the maximum wage basis for Social Security taxes, then you won’t have to pay any. In 2022, the amount was $147,000, but in 2023, it will be $160,200.<\/p>\n\n\n\n
Medicare taxes on the other hand are levied on all earnings, without exception.<\/p>\n\n\n\n
Employer and employee contributions to Social Security are split into two categories for 2022 and 2023, totaling 12.4%. Employers and employees each contribute 6.2% of the total.<\/p>\n\n\n\n
Likewise, both the employee and the employer contribute 2.9% to Medicare. In this case, both the employee and the employer contribute 1.45%.<\/p>\n\n\n\n
Workers who earn more over a certain threshold amount must pay an additional 0.9% Medicare tax. This sum for individuals in 2022 is $200,000 ($250,000 for married couples filing jointly).<\/p>\n\n\n\n
So, a worker’s overall Medicare tax could be as high as 2.35% (1.45% plus 0.9%) depending on their income. The increased Medicare tax is not needed to be matched by employers.<\/p>\n\n\n\n