What Is FICA?
What Is FICA?
FICA stands for Federal Insurance Contributions Act. It is a law in the U.S. that requires a certain deduction from an employee’s paycheck for Social Security and for Medicare. Employers deduct a set percentage from the employees’ salaries and are expected to match the same amount for the employees’ benefits. This law also stipulates that there is a maximum amount for Social Security deductions, while there is no limit for the Medicare program. Social Security involves benefits on retirement, disability, and survivorship, while Medicare is a form of medical and hospitalization insurance.
The amount of FICA deductions depends on the employee’s income. The higher the income of a particular individual, the higher will be his/her deduction. For self-employed individuals, one must pay the full amount. But half of the amount paid qualifies as a deductible business expense. It is the Social Security Trust Fund that is tasked to collect the employee contributions, while the Department of Treasury manages the collected money and invests it on securities backed by the national government.
FICA came as a result of the Social Security Act of 1935, which was proposed then by Pres. Franklin D. Roosevelt. But tax collection and giving out of benefits did not start until 1937. By 1939, amendments were made to the law to include those who are unable to pay into the system, like the orphans and widows of working spouses, and the elderly. Only people who were under 65 and worked for commerce and industry were the original beneficiaries of the program. Back then, medical personnel, government employees, lawyers, and agricultural workers were exempt from FICA, but they were also not able to collect monies from it. Restrictions were later lifted to accommodate more employees from different sectors.
Benefits are reserved for those who have paid their contributions. At age 62, one can start collecting reduced benefits. Full benefits depend on the employee’s birth year, and mostly get their benefits at around age 65-67.