A Brief History
In March 2014, the Supreme Court reversed a lower court decision in U.S. v. Quality Stores, Inc. by holding that severance packages are taxable wages for FICA purposes. You probably wonder, “What is FICA tax and does it affect my pay?” After all, many pay stubs have a box labeled “FICA.”
To give a FICA definition: This “umbrella” program encompasses Social Security, Medicare, and certain other federal programs. Do you want to understand the details of your paystub? What is FICA after all? Learn what FICA stands for and what it is for now in the paragraphs to follow.
What Is FICA Tax and What Does FICA Stand For?
FICA stands for the Federal Insurance Contributions Act of 1935. Contributions to FICA are mandatory for anyone who is employed (but not self-employed). FICA rates are set annually, though they do not necessarily change annually. Employers must withhold these taxes from employee paychecks and pay them directly to the Internal Revenue Service (IRS). You can see the amounts paid on your paycheck stubs, though. Read more about this topic here.
Origins of FICA
FICA (at first called the Social Security Act) was initiated in the mid-1930s by Franklin D. Roosevelt, largely in response to the devastation caused by the Great Depression. Various predecessors to the program had existed since the late 1800s. Since FICA’s implementation, Congress has stepped in several times to broaden the base of qualified Social Security recipients as well as enhanced programs such as cost-of-living adjustments (COLA).
To support the long-term viability of Social Security, Congress has increased the payroll contribution percentage and wage limits for contributions. It has also begun raising the age at which non-disabled individuals can collect full benefits. Medicare was passed into law on July 30, 1965, during the Johnson Administration, and beneficiaries were first able to sign-up for the program on July 1, 1966.
When you look at your pay stub, you might not see FICA mentioned directly, but instead, Social Security and Medicare contributions listed separately. Either way, they refer to the FICA programs. The amount paid to FICA depends on an employee’s income.
For Social Security contributions, there is a maximum wage base. No contributions are required for additional income. For 2019, the maximum wage base is $132,900. The Social Security tax rate is 6.2%
The tax rate for Medicare is 1.45%. There is no wage base limit, however. There is an additional 0.9% tax on wages over $200,000 for individuals ($250,000 for married couples filing jointly) paid by employees.
Self-Employed Individuals and FICA
Self-employed people pay into Social Security and Medicare through a different tax, called SECA (Self-Employment Contributions Act) that is collected via their federal tax returns. These individuals pay both the employer and employee shares. Neither FICA nor SECA taxes fund Supplemental Security Income (SSI) benefits. Those are paid out of general tax revenues (even though the program is administered by the Social Security Administration). We should also point out at this point that not all wages are subject to either SECA or FICA tax.
So Now You Know
What is FICA? We hope you understand the FICA meaning now, so it will be clear what has been deducted from your pay and why. We realize this information can be a little confusing.
For us, the best part of reading about FICA was learning its history. It makes sense that it came about when it did, and it still makes sense today. Let us hope both Social Security and Medicare continue to support people in their retirement for a long time to come!
Question for students (and subscribers): Do you support FICA taxes? Please let us know in the comments section below this article.
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For more information, please see…
Adams, Charles. For Good and Evil: The Impact Of Taxes On The Course Of Civilization, 2Nd Edition. Madison Books, 2001.
The featured image in this article, a photograph by Paultbarham of an Erwin Mills 1956 pay stub, Falls, North Carolina, is licensed under the Creative Commons Attribution-Share Alike 4.0 International license.