The Federal Insurance Contributions Act (FICA) is a piece of legislation that you might be familiar with, but do you fully understand what it involves?
In order to collect payroll taxes and provide funding for services like as Social Security and Medicare, this statute in the United States was enacted.
That may sound complicated, but don’t worry; I’ll explain it in a straightforward manner. More than a million people are able to access benefits such as retirement or disability assistance thanks to the Federal Insurance Contributions Act (FICA).
This is how it operates. The amount of money that is withheld from your salary by your employer is then used to pay for these perks. If you are self-employed, the situation is slightly different: you are responsible for paying the whole amount of that tax; however, you are able to deduct fifty percent of it when you file your taxes.
Exactly what it is, and how it affects the amount of money you contribute to Social Security
Imagine that you are employed by a corporation. 7.65% of your wage is deducted from your paycheck each time you get payment. Due to the fact that you are also responsible for covering the portion that would be paid to the employer, this percentage increases to 15.3% if you are self-employed.
After some time has passed, you will be able to deduct fifty percent of that total cost.
The $2.2 Billion Bicentennial Quarter: Could It Be in Your Pocket Right Now?
So, where does all of that money go?
Programs such as Social Security, which assists more than 72 million individuals with their retirement, and Medicare, which covers medical expenses for another 61 million individuals, are examples of governmental assistance programs.
Do you think that’s a lot of money?
Indeed, it is. Just in 2023, Social Security collected more over $1.35 trillion in revenue, which indicates that these programs are extremely costly to sustain.
Let’s take a straightforward example.
Imagine that you have a monthly income of $2,000. Taking into account the current rates, a tax of 15.3% would be applicable, which would amount to $306.
On the other hand, because it is a shared duty, you would be responsible for paying half of it ($153), and your employer would be responsible for paying the other half. There would be a total of $306 allocated to Social Security, $248 to Medicare, and $58 to Medicare.
The full amount of $306 would be required of you if you are self-employed; however, you should keep in mind that you are eligible to deduct $153 from your annual taxes.
New Year, New Stimulus: What Payments Could Be Waiting for You in January 2025?
The constraints and specifics that you need to keep in mind
There are two primary components that make up FICA: the Social Security tax, which is 6.2%, and the Medicare tax, which is 1.45%. On the other hand, these taxes do not apply to the entirety of your wage.
For instance, the maximum amount of money that can be accepted by Social Security in 2024 is $168,600. Any sum that is in excess of that is exempt from taxation for Social Security purposes.
It is important to note that Medicare does not impose a salary cap; nevertheless, if you have a high income, you will be subject to an additional tax of 0.9%. That is applicable to:
- Individuals who are single and have a salary better than $200,000.
- Jointly filing for tax purposes by married couples with incomes greater than $250,000.
- Those married couples who file their taxes separately and have a combined income of more than $125,000.
There would be a total Medicare rate of 2.35 percent in these circumstances.