What is FICA Tax?
What is FICA Tax?
The acronym FICA refers to Federal Insurance Contributions Act. This is a federal act mandating employers to deduct a particular percentage from the salary of every employee each pay period. As an added requirement, FICA mandates the employer to match the amount deducted from each employee and put the money to Social Security Trust Fund, which is a government account. The fund will be used for retirement, insurance, Medicare and other benefits of retirees.
The person behind the FICA is no other than President Franklin Roosevelt. Social Security Act of 1935 initiated the FICA. The program started collecting payments and taxes, as well as paying benefits in the year 1937. In 1939, an amendment including orphans and widows and the elderly persons who did not pay for the system was passed.
Initially, benefits from Social Security are only meant for persons under 65 years of age provided that they had worked in jobs considered as industry and commerce. There are some people under particular occupations that are exempt from the FICA tax. Such persons are those who work under the government offices, agricultural sectors, medical field and law. These people are not required to pay for FICA tax, so the federal government cannot collect money from them. Presently, this limitation was lifted and everyone is included in participation to paying FICA tax. However, there are still categories of workers that are given option not to contribute to FICA.
The money raised from the collection of FICA tax is managed by the Department of Treasury. The department is tasked to invest the money in various government backed securities. In simple terms, it is like the government loaning the money to itself and utilize for financing other projects. When the security bonds become due, the money is paid back to the Social Security Trust Fund contributors.
Social Security Trust Fund gives benefits to people who only paid contribution to the fund. At the age of 62, a person may already collect benefits, though at a reduced benefit. Birth year was the determining factor in receiving full benefits. People born prior to the year 1938 will be able to collect full benefits at age 65. However, for those people born between 1938 and 1949 the case is different. The rate of the age increases two months per year until age 66. People born between the years 1943 and 1954, retirement age remains at 66.
Initially, benefits collected from Social Security are non taxable. But in 1983, an amendment passed by Congress mandates the collection of tax from Social Security benefits. The amendment provides that half of the benefit amount is taxable. This however, is limited to a total income that goes beyond the set up limit. Ten years later (1993), the amount of taxable income increases to 85%.
Benefits from the Social Security Trust Fund are deemed beneficial for retirees. The most common problems with retiring are addressed by the fund. The program has also been proven to help retirees from having continuous income after retirement age. Moreover, retirees will have no problems with hospitalization as the fund includes medical insurances for their assistance.