What is FICA tax and how is it calculated? – Paid

This article explains the basics of FICA tax in a simplified way, covering what it is, how it's calculated, and why it matters.

1. What is FICA Tax?

FICA stands for the Federal Insurance Contributions Act. It's a tax that comes out of your paycheck to help pay for two important things: Social Security and Medicare. Social Security provides money to people when they retire or if they're disabled. Medicare helps pay for healthcare when you're older or have certain disabilities.

2. How Do They Calculate FICA Tax?

Your FICA tax is figured out as a percentage of the money you make from your job. There are two parts to FICA tax:

Social Security: In 2023, they take 6.2% of your earnings, but only up to a certain amount (around $147,000). If you make more than that, you don't pay Social Security tax on the extra money.

Medicare: For Medicare, they take 1.45% of everything you earn, and there's no limit. If you make a lot (over $200,000 for individuals or $250,000 for couples), you pay an extra 0.9% for Medicare.

3. Why FICA Tax is Important

FICA tax is important for a few big reasons:

Social Security Benefits: The money you put into Social Security through FICA tax helps you later. When you retire or if you become disabled, you can get Social Security benefits based on how much you've paid in.
Medicare Coverage: Paying Medicare tax means you'll have access to healthcare when you're older or if you have certain disabilities. It helps cover medical costs.
Financial Security: FICA tax is like a savings plan for your future. It provides financial support for retirees, people with disabilities, and their families.

4. Who Pays FICA Tax?

Most people who work in the U.S., whether they're employees or self-employed, pay FICA tax. If you work for someone else, your employer takes the money out of your paycheck. If you work for yourself, you need to pay both the employee and employer parts of FICA tax.

5. FICA Tax and Social Security

The Social Security part of FICA tax helps build up your Social Security benefits. The more you pay, the more you'll get in Social Security benefits when you need them.

6. FICA Tax and Medicare

The Medicare part of FICA tax helps pay for your healthcare when you're older or if you have certain disabilities. It ensures you can access medical services.