Federal Insurance Contributions Act (FICA)
Candlefocus EditorFICA taxes are imposed on the gross pay of a wage earner, including wages, salaries, bonuses and commissions. The amount withheld depends on gross wages, with a maximum FICA withholding of $7,979.10 for 2020. Employers are also required to match the FICA taxes paid by their employees, who cannot opt out of paying these taxes.
Those who pay FICA can expect to receive Social Security and Medicare benefits when their eligible age. Social Security benefits may include a portion of the wage earner’s income, a one-time payment for retirees who have worked for at least 10 years and a one-time lump sum payment for disabled individuals who can no longer work. Medicare benefits include health insurance for those aged 65 and over, as well as certain individuals who are disabled, despite their age.
Individuals’ FICA contributions pay current benefits and build future ones that will be owed to them. The Social Security Administration also uses FICA taxes to adjust existing benefits for inflation, as well as for calculating benefits for survivors and dependents of deceased wage earners.
Overall, FICA is an essential component of the U.S. welfare system, providing individuals with essential Social Security and Medicare benefits while they are alive and after they pass away. Paying FICA taxes is essential to ensure that those benefits are available when needed and that the Social Security system is adequately funded for future generations.