Understanding FICA
You have probably noticed that every time you collect a paycheck, there is a line that notes a deduction for “FICA.” FICA, or the Federal Insurance Contributions Act, is a form of tax paid jointly by employees and employers that provides funding for Social Security and Medicare, which provides benefits for the elderly and the disabled. A regressive tax, FICA is levied only on the first $102,000 of gross wages.
Calculation
FICA undergoes a fairly complex computation, depending on whether or not you are a regular employee or are self-employed. Because FICA is jointly paid both by employers and employees, the self-employed are subject to a separate but similar law for taxation. FICA is only charged on the first $102,000 in gross earnings, and the total Social Security tax is 12.4% of wages, with Medicare accounting for 2.9% of wages.
History
The FICA tax was originally created during the Great Depression as a means of providing a security net for working-class Americans who were especially affected by the economic downturn. The FICA tax provided relief for Americans who had not saved money for their retirement or had lost their savings during the market failures.
Criticism
Many people, criticize FICA for providing either too big of a safety net, being too expensive to run, or for forcibly taking extra tax dollars from citizens. Another common criticism is that the amount paid in taxes over a worker's life is not guaranteed to be seen when that worker retires. That is, if a worker pays in $300,000 to FICA over his working life, he may see significantly less than that come back to him in his own retirement. And, like all other Social Security funds, FICA will soon be stressed to the breaking point by retiring baby boomers.
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If you have questions about the FICA tax and how it affects you as an employee or a business owner, contact Texas Legal Entities today at 512-472-2431.
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