What is FICA and Why are They Taking my Money?
Try not to get too excited, but this week we're talking about taxes! 😆What do you know about FICA? Have you ever noticed the deduction on your pay stubs and wonder what it was all about? FICA stands for Federal Insurance Contributions Act (FICA); put simply, FICA is a federal payroll tax. FICA is the money that comes out of your gross wages to pay social security taxes (old-age, survivors, and disability insurance) and Medicare taxes (hospital insurance tax).
How much comes out of your check?
The total amount that you pay is 7.65% of your gross wages. 6.2 percent goes to social security tax, and the remaining 1.45 goes to Medicare tax. Unless you're self-employed, your employer helps out by matching your contributions bringing the total to 15.3%. Self-employed individuals are responsible for the total amounts. Keep in mind that everyone's situation is different, these amounts apply to many, but there are exceptions.
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| Individuals over a certain income threshold may pay an additional withholding. |
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| Remember, employers match these contributions bringing the total to 15.3%. |
What happens with the taxes that you pay?
You may think that the FICA taxes you pay are saved in an account just for you, but that isn't the case. These taxes help to fund social security and medicare programs. These programs provide benefits for retirees, the disabled, and children. Today's workers help pay for the current retirees' and other beneficiaries' benefits. Disappointed? Don't be. There is good news. As you work and pay these taxes, you earn credits for your own social security benefits.
What about my benefits?
Is it all about you? Just kidding! There is a rather complicated formula used to determine the social security benefits for an individual. The good news is that you do not need to know the formula. It's calculated for you. The United States Social Security Administration has detailed information about the years you worked, your earnings, and projected benefits.
It's a good idea to create an account on ssa.gov to access the information available to you. Your Social Security Statement may just surprise you with what you learn. Contrary to what some may believe, Social Security benefits usually cover only a portion of your pre-retirement income. We're talking less than 50% (closer to 40%). Can you live off of that? Once you access your account, you may find the projected benefits to be just what you imagined, less than what you imagined, or more than you imagined. The point is knowing. The more you know, the more you can plan and prepare.
Final Thoughts
There will be more to come about social security benefits and planning, but now you know (or know more) about FICA, what it is, where it goes, and how to learn more about your actual social security benefits.
References:
- Social Security and Medicare Withholding Rates - www.irs.gov/taxtopics/tc751
- The United States Social Security Administration - https://www.ssa.gov