Federal Insurance Contributions Act (FICA)

what is FICA Tax

As a responsible citizen or taxpayer of your country, you have to know what is FICA tax. The Federal Insurance Contributions Act (FICA) is a law in the United States of America. This law deals with the tax system of the U.S., as it makes it compulsory to pay a kind of payroll tax, which is commonly known as the FICA tax. So, let’s see what is a payroll tax, and what is FICA tax.

Salary and Taxes

People do various types of jobs, for which they are paid a fixed amount called salary. Salary is paid to the employers after a particular interval of time, which is mostly a month. That means an employer gets his salary after the completion of every month, for his service. But you can see that the actual amount that you take home with yourself is different or lesser from the total figure of your salary. This happens because of the taxes. Citizens pay several types of taxes to the federal government, which are mandatory. In turn, they receive various services from them. And because of these tax deductions, you take home an amount which is lesser than your actual salary.

This is one of the major reasons why we see people coming on the streets when their authorities or the government is not fulfilling their expectations. People refuse to pay taxes if the government is not doing its work properly, because whatever they earn is a fruit of their hard work, and they pay taxes from that income. So, they expect a good quality return from the authorities. In a way, we can say that both the citizens and the authorities are responsible for each other.

While discussing about the taxes, you have to keep in mind that not each and every citizen is required to pay the taxes. Because people get different levels of income as their salary, depending upon the nature of their job. People at higher professional positions get paid more than those at the lower position. So, a level of income limit is decided to finalize who will pay the taxes and who will not.

Those who have a lower income than this decided limit, are exempted from the taxes, to reduce their financial burden. Also, those who try to avoid taxes or pay them late, are penalized for their actions. Thus, we can say that the federal taxation system is one of the most organized financial systems in the country. And the taxes that citizens pay are probably the most important source of the nation’s income.

Payroll Taxes

The revenue that a country receives is majorly divided between two sections – tax revenue, and non-tax revenue. And from the various taxes that the government receives, the payroll taxes are the important ones. In fact, the FICA taxes are also a kind of payroll taxes, they are a combination of payroll taxes. Payroll taxes form a large share in the whole federal tax revenue structure – more than 35% of the federal taxes are paid in the form of payroll taxes. So, the revenue that the authorities receive from the payroll taxes is equally high, which was more than one trillion dollars, for the fiscal year of 2018. So, you can see how important the payroll taxes are.

To be precise, the payroll taxes are one of the largest parts that are being cut from your actual income. And they are the major reason because of which you have a lesser amount with you, than your actual salary. But, paying these taxes is a part of our social responsibility, as these taxes are essential for maintaining the social security. There is also a fixed income limit for citizens who should pay these taxes. The FICA tax is a combination of two payroll taxes, which are mandatory for citizens to be paid.

What is FICA tax

You have to understand what is FICA tax, in order to know how it is processed further. As mentioned above, the FICA tax is like a combination tax, comprising of two payroll taxes. It is mandatory to be paid, for those who earn wages or salaries. This tax is separate from the income tax, and it is an addition to the income tax. The FICA tax consists of two payroll taxes, one of which is for social security, and the other for the purpose of medicare.

The two payroll taxes are paid as a contribution from the employers, for medical and health care programs, and social security. If a person is self-employed, that does not mean he will be exempted from the FICA taxes. Because, there is an equivalent federal taxation law for FICA taxes, which is known as SECA tax – the Self-Employed Contributions Act. Thus, paying the FICA tax is one of the most important duties that cannot be avoided by anyone.

The money collected from the FICA taxes goes directly to the government, as it is also another form of payroll tax only. The government further makes use of this tax revenue, in the field of medical services and social security services. The revenue collected from the FICA taxes is also used for the social security of old-age people, survivors, and people with disabilities. And statistics have shown that the FICA tax revenue has played an important role in providing social security to these weaker sections of the society. So, we can say that a person is fulfilling an important social responsibility if he is paying the taxes on time.

FICA taxes – Understanding more

Talking about what is FICA tax, and the tax rates of FICA taxes, have been increased since their launch, and they never have been reduced. The rates for the FICA tax are set annually, but that does not necessarily mean that they will be changed after the completion of every year. They have been kept the same for consecutive fiscal years, or there were just minor changes that were introduced. E.g. the tax rates for the fiscal year of 2019 and 2020 were kept stable, without introducing any significant changes.

The FICA tax rates are directly proportional to the income of the employee – they will increase with the increasing income. The tax rates have been kept consistent for the past few years. As both the employees and the employers are required to pay FICA tax, the tax amount is split between them. As of now, the tax rate for social security tax is 6.2%, and the rate for medical care tax is 1.45%. And this rate has been kept the same for both employees and the employers, so both of them pay a total of 7.65% of their total income, in the form of FICA taxes.

There are exemptions in the FICA tax as well. If the earning citizen is a college-going person, then he is not required to pay the FICA tax, for the on-campus job that he does. The foreign government workers and the teachers are also exempted from paying the FICA taxes. And a major exception is the civilian federal employees of the U.S., who were hired before the year 1984.

They are exempted from the FICA taxes, though they enjoy limited benefits from that tax. Apart from these groups, there are certain religious groups that have the right to apply for an exemption from FICA taxes. But it is ideally suggested that a responsible citizen should avoid such a voluntary exemption if he is living in a sound financial condition. Because, he loses his right to take benefits from the social and medical care services, by not paying the FICA taxes.

After understanding what is FICA tax, and what are the various aspects involved in the concept of FICA taxes, now let’s talk about who has to pay FICA taxes. Because, as we have already talked about various important facts like the tax rates, the nature of the tax, and the groups exempted from the FICA taxes, it is also necessary to understand who has to pay FICA taxes. Because they are the real contributors in the process.

Who has to pay FICA taxes?

It is to be noted that it is mandatory to pay the FICA taxes, for all the wage income-earning and salary earning citizens in the U.S. In fact, it is compulsory for them to pay three important taxes – the federal income tax, the Medicare tax, and the social security tax. And the FICA tax is a combination of the medicare and social security tax. So, except for a few exemptions, everyone is bound to pay the FICA tax.

Both the employers and the employees are required to pay the FICA tax, according to the rules and regulations under the Federal Insurance Contribution Act. Thus, the employers are entitled to the authority to check after the execution of it. It is included in the federal payroll tax responsibilities of the employer, to manage the payment of the FICA taxes. Though the FICA tax payment is split between the employee and the employer, the tax rate is kept the same for both of them. Thus, no group is required to pay more or less tax than the other.

The employer withholds the FICA tax amount from the employee’s pay or salary (it’s like taking that part out from the employee’s salary and keeping it aside for the tax payment), and later submits it as the contribution from the employee, in the form of FICA tax. The independent contractors also pay the FICA tax.

As mentioned before, even the self-employed citizens are required to pay the FICA tax, but it is known with another name. Under the Self-Employed Contributions Act (SECA), the self-employed people make their contribution to the taxation system. Thus, we can say that except for a few exemptions that are mentioned above, almost all earning citizens are required to pay the FICA taxes.

To conclude, it can be said that paying taxes regularly is one of the most important duties of a responsible citizen. And providing quality services and trustworthy rule in return, is an important duty of the authority that earns revenue from these taxes. And if all of them go hand in hand, the country will surely prosper.

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