what is Federal Insurance Contributions Act (FICA)

The Federal Insurance Contributions Act (FICA) is a US federal payroll tax that funds Social Security and Medicare. It is a mandatory tax applied to earned income, with a total rate of 15.3% split evenly between employer and employee contributions. Here's a detailed breakdown: 1. **Components of FICA**: FICA consists of two taxes: the Social Security tax at 6.2% and the Medicare tax at 1.45%. The total FICA rate is 15.3%, with the employer contributing 7.65% and the employee contributing 7.65%. 2. **Social Security Tax**: The Social Security tax is applied to the first $176,100 of wages earned in 2025, with a rate of 6.2% for both the employer and the employee, totaling 12.4%. 3. **Medicare Tax**: The Medicare tax is applied to all earned income, with a rate of 1.45% for both the employer and the employee, totaling 2.9%. 4. **Additional Medicare Tax**: High earners are subject to an additional Medicare tax of 0.9% on wages earned above $200,000 (or $250,000 for joint filers) per calendar year. 5. **Employer Responsibility**: Employers are responsible for withholding FICA taxes from employee paychecks and paying those taxes to the government on the employee's behalf. Failure to comply can result in significant penalties. 6. **FICA and Benefits**: The FICA tax is tied to benefits; the amount paid in taxes throughout one's working career is associated with the social security benefits annuity received as a retiree. This means that FICA taxes are essentially a mandatory contribution to fund current retirees' benefits, with the promise of equivalent benefits for future retirees. In summary, FICA is a critical component of the US social security and healthcare funding system, with a structured approach to tax collection and benefit distribution.