Many employees wonder what "FICA" actually stands for when examining their paychecks. Those four little letters can often have a big impact on the size of a paycheck. FICA, which stands for the "Federal Insurance Contributions Act," is a tax enacted by the federal government to support its disability and retirement programs.
The Definition of "FICA"
FICA stands for the "Federal Insurance Contributions Act." The official title is often shortened, particularly on paychecks and other tax documents, to FICA.
FICA was established by the federal government through a series of taxes enacted to support the Social Security Administration (SSA) begun in the 1930s. The official name "FICA" was not created until 1939. Similar to other federal taxes, the Internal Revenue Service (IRS) collects these funds. The SSA, however, has the authority to disburse them.
The federal government requires all employed persons in the United States to pay FICA taxes, regardless of whether they work for themselves, work freelance or how much money they earn in a year. Self-employed and freelance individuals are required to calculate and remit their FICA tax obligation to the IRS at least on a quarterly basis. Employers are required to subtract the tax from employee's paychecks; hence, the appearance of "FICA" on a paycheck. Failure to pay FICA can result in fines or a denial of disability or retirement benefits.
The federal government also requires employers to contribute to FICA taxes for each person they employ. Usually, the total tax liability is split evenly between employer and employee, meaning that they each pay an equal amount. Because of this, FICA is sometimes referred to as a "contribution" system rather than a tax. Employers failing to comply with this requirement may be subject to fines for overdue payments and penalties. Self-employed and freelance individuals are responsible for the entire amount.
Amount of FICA Taxes
The amount of FICA taxes collected by the IRS changes each year to account for inflation, as well as the agency's need. In 2011, the IRS taxed 12.4 of net income. If split evenly, an employer and employee each pay 6.2 percent. This amount is usually split over the three month period in each quarter, resulting in 2 percent of an employee's monthly paycheck being withheld for FICA. Self-employed and freelance workers pay the entire 12.4.
The Reasons for FICA
FICA is used by the SSA to fund its Social Security disability (SSD) and Social Security retirement income (SSI) benefit programs. To receive either type of benefit, a taxpayer must have paid into the system.
The general agency rule is that an individual must have a certain number of "work credits" to be entitled to either SSD or SSI benefits. This term refers to how many quarters of a year an individual worked and paid a minimum of $700 of taxes into the system. As of 2011, the SSA required that individuals age 31 and older have a minimum of 20 credits. Exceptions are made for extremely disabled individuals seeking disability benefits who are under age 21 or individuals disabled from birth.
The individual or employer is responsible for reporting the employment and taxes paid to the SSA each quarter. Failing to have met the required number of work credits means that an applicant for SSD or SSI runs the risk of having their benefit request denied.
Your Paycheck and FICA
Despite the annoyance of having a portion of your paycheck removed to pay FICA taxes, it is actually intended for your own good. Paying FICA means that you have federally-managed backup and retirement funding.