What is FICA?

At a glance

The Federal Insurance Contributions Act, or FICA, is a payroll tax deducted from American workers' paychecks. It is used to fund two distinct federal programs: Social Security, which provides retirement, disability, and survivor benefits, and Medicare, which offers healthcare coverage for individuals aged 65 and older, as well as certain younger individuals with disabilities.

Published on:
June 12, 2024

Understanding FICA

The Federal Insurance Contributions Act is a payroll tax on US workers' wages passed in 1935 to raise revenue for new government programs. The idea here is that, throughout their lives, workers would contribute to Social Security (and now Medicare) through their taxes, and later in life, they could rely on receiving those earned financial and healthcare benefits. The act also requires that employers match employees' contributions, meaning they must contribute an equal amount to the employee's FICA tax. Self-employed workers are also responsible for paying FICA taxes, and the Self-Employment Contributions Act of 1954 declared that they must cover the entire portion traditionally split by employee and employer.

The Federal Insurance Contributions Act (FICA) is a payroll tax on US workers' wages that funds Social Security and Medicare. Both employees and employers contribute.

Diving Deeper into FICA

President Franklin D. Roosevelt established Social Security in 1935 to help aging individuals and families. The FICA tax was introduced shortly after the program to fund it, with workers contributing and later reaping the same benefits their taxes helped provide for others. Medicare, established in 1965, is a healthcare initiative to provide financial security to older Americans. From American workers' paychecks, 6.2% of gross wages go toward Social Security tax, and 1.45% goes toward Medicare. Employers must match these percentages for a 15.3% contribution per worker. 

FICA taxes, originally established by FDR, now require workers to contribute 6.2% of wages toward Social Security and 1.45% toward Medicare, which employers must match.

The Benefits of FICA

Ultimately, FICA is a system aimed at helping elderly and disabled Americans through financial security, retirement benefits, and disability insurance. It plays a crucial role in providing a safety net for these vulnerable populations, ensuring that they have access to basic financial support and healthcare. While taxes are technically compensation taken out of all of our paychecks, the benefits are that those funds should eventually be 'returned' to you in the form of these essential services. 

FICA provides financial security for elderly and disabled Americans through retirement and disability benefits and taxes from workers' paychecks. These contributions eventually benefit the contributors when they receive their own financial support.

Challenges and Considerations

Employers are responsible for paying FICA payroll taxes. They are not just withholding an employee's Social Security and Medicare taxes from their compensation and providing the matching employer contribution, they are also ensuring the financial security of their employees in the future. Businesses should be mindful of making accurate and timely calculations and payments of FICA taxes to avoid non-compliance. These tax obligations can impact a company's cash flow, especially for small businesses and those with fluctuating revenue. Still, employers must match the FICA contributions made by their employees to avoid potential IRS penalties. By fulfilling these obligations, employers are not just avoiding penalties, they are also contributing to the overall welfare of their employees and the country.

To avoid non-compliance and corresponding penalties, employers must accurately and promptly withhold and pay FICA payroll taxes, including matching employee contributions.

Best Practices for Small Businesses

All American businesses, regardless of their size, are accountable to FICA tax requirements. While small businesses may not be the highest-risk candidates for IRS audits, they are an integral part of the system. Following best practices will not just help them maintain compliance, but also contribute to the overall financial security of elderly and disabled Americans. Keeping detailed payroll records and correctly calculating the correct amount of FICA taxes to withhold is not just a legal requirement, it's a way of ensuring the welfare of the society. Additionally, staying updated about current tax rates and making timely payments to the IRS will allow you to avoid possible penalties. Small businesses can consider using payroll management software or other digital tax tools to automate and streamline accurate payments, making the process easier and more efficient. 

All businesses in the US must comply with FICA tax requirements, including accurate calculation, withholding, and timely payment of taxes to avoid penalties. Small businesses can benefit from using payroll management software to automate these processes and stay updated on current tax rates.

Main takeaway

The Federal Insurance Contributions Act (FICA) is a payroll tax funding Social Security and Medicare. All employees, employers, and self-employed workers contribute to support financial security for elderly and disabled Americans. To avoid penalties, employers must accurately calculate, withhold, and pay FICA taxes on time. 

About the author

Casey Pontrelli

Casey Pontrelli is a multi-talented professional with a background in content creation, branding, and social media marketing. Whether writing for a newspaper, eCommerce website, B2B startup, or a marketing agency, she has taken her strong background in journalism and turned her focus to SEO and content marketing. She’s written about everything from boutiques to cars to small businesses, and enjoys most when she knows her writing has had an impact. When she’s not writing up a storm or creating attention-grabbing social media posts, Casey enjoys hanging out with her partner and three cats, Eddy, Larry, and Marcus, going on long walks in the Green Belt, and, predictably, reading.

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