Federal Insurance Contributions Act

Median household income and taxes

Federal Insurance Contributions Act (FICA) is a United States federal law that mandates the collection of payroll taxes from employees and their employers to fund the Social Security and Medicare programs. Enacted in 1935 as part of President Franklin D. Roosevelt's New Deal, FICA is crucial for maintaining the financial health of these social insurance programs, which provide benefits for retirees, disabled individuals, and children of deceased workers.

Overview

FICA taxes are composed of two main components: the Social Security tax and the Medicare tax. Both employees and employers are required to contribute to these taxes, which are calculated as a percentage of the employee's payroll. For self-employed individuals, the Self-Employment Contributions Act (SECA) imposes similar taxes to fund Social Security and Medicare.

Social Security Tax

The Social Security tax finances the Social Security program, which offers retirement, disability, and survivorship benefits. The tax rate for Social Security is determined by law and has changed over time to reflect the financial needs of the program. As of the current law, the tax is levied on income up to a certain limit, known as the Social Security Wage Base, which is adjusted annually to account for inflation.

Medicare Tax

The Medicare tax supports the Medicare program, which provides health insurance to individuals aged 65 and older, as well as to younger people with certain disabilities. Unlike the Social Security tax, the Medicare tax is applied to all earned income without a cap. Additionally, high-income earners may be subject to an additional Medicare tax, as specified by the Affordable Care Act.

Compliance and Collection

Employers are responsible for withholding the correct amount of FICA taxes from their employees' paychecks and for paying their portion of the taxes. The Internal Revenue Service (IRS) oversees the collection and enforcement of these taxes. Failure to comply with FICA requirements can result in penalties and interest charges for both employers and employees.

Impact and Criticism

FICA taxes represent a significant source of revenue for the federal government, funding key components of the social safety net. However, the system has faced criticism from various quarters. Critics argue that the regressive nature of the Social Security tax (due to the income cap) and the burden it places on lower-income workers are unfair. There are also concerns about the long-term solvency of the Social Security and Medicare programs, given the aging population and increasing healthcare costs.

Future of FICA

Debate continues over the future of FICA and the programs it supports. Proposals for reform include raising the Social Security Wage Base, increasing the retirement age, and making changes to the benefit formula. The goal of these reforms is to ensure the sustainability of Social Security and Medicare for future generations.