If you take the time to review your pay stub, you'll see deductions for items like federal income tax, health insurance, contributions to retirement accounts and FICA.
The FICA deduction is a payroll tax that all workers, regularly and self-employed, pay to the federal government. This money funds the Social Security and Medicare programs.
Federal Insurance Contributions Act
When the stock market crashed in 1929, people across the country lost their life savings. As a result, they had no money to pay their bills after retirement.
In response to the crisis, President Roosevelt established the Social Security program under the Social Security Act of 1935. Through this program, the government pays disabled individuals and retirees money to help cover their living expenses.
In 1939, Congress enacted a tax provision with a new name: the Federal Insurance Contributions Act tax, commonly called FICA, authorizing the IRS to collect the money designated for the program.
How much does FICA take?
FICA allows the IRS to take 12.4 percent of each worker's earnings for Social Security and 2.9 percent for Medicare.
People who work for an employer pay half of these taxes, or 6.2 percent and 1.45 percent of what they earn during each pay period for Social Security and Medicare, respectively. The employer pays for the other half.
Self-employed workers must pay the entire 15.3 percent. The IRS charges an additional 0.9 percent tax on income exceeding $200,000 for a single person (or head of household or qualifying widow), $250,000 for a couple filing jointly and $125,000 for a married couple filing separately.
The Social Security portion of the FICA tax has an annual cap established by the Social Security Administration each year. For example, the 2016 cap was $118,500. Any worker who pays more than that amount for the year receives a refund for the overage. The Medicare portion of FICA has no such cap.
What does FICA do?
All money collected through FICA goes directly to the Social Security and Medicare funds. These funds then disperse the money to the people who qualify for the programs.
Social Security provides benefits for retirees and their spouses, disabled workers and children of deceased workers, while Medicare offers health care coverage for senior citizens.
However, it is important for workers to understand that the money they pay to FICA does not go into a fund for themselves. Instead, it pays benefits to people currently enrolled in the programs. By the time today's workers reach retirement age, the FICA contributions of wage earners working at that time will pay for their benefits.
Social Security. Retirees and their spouses are, by far, the largest group of Social Security beneficiaries. When they reach retirement age, they begin receiving payments from the program.
The Social Security Administration considers the amount of money the retiree made as a worker as well as the retirement age to determine the amount of each payment.
The second largest group of beneficiaries is disabled workers and their families who have no other viable sources of income as the result of the disability.
Children of deceased workers also receive some Social Security benefits, usually at least 75 percent of the basic Social Security benefit.
Medicare Medicare is a federal health insurance program for people who are at least 65 years old. This program joined FICA in the 1960s to ensure that senior citizens have the ability to cover the costs of their medical care.
Currently, there are four parts to Medicare that cover the following inpatient hospital care, doctor visits, outpatient hospital care, medical services and prescription drugs.
Medicaid, which provides health insurance for low income individuals and families, is a separate program that receives no funding from FICA.