Everyone who has received payroll checks has probably noticed regular deductions for something called FICA. This represents the amount, paid by both employee and employer, that goes to fund Social Security and Medicare under provisions of the Federal Insurance Contributions Act.
Origin of FICA
When Congress enacted the original Social Security law 1935, it included provisions for benefits and payroll withholding taxes for funding to support the program. In 1939 the Social Security Act was amended and the taxing provisions were placed under the Internal Revenue Code, with the name Federal Insurance Contributions Act. The taxes collected for Social Security are contributions to that insurance system.
Since the 1930s, the Social Security programs have expanded and FICA withholding taxes have come to support Old-Age, Survivors' and Disability insurance, called OASDI. FICA was increased in the 1960s to provide funding for Medicare when that program became law. The tax revenue generated by the FICA withholding goes to several federal trust funds. These trust funds are the backup for the Treasury Department's normal payments of benefits and expenses.
Contributions Under FICA
There are two components to the FICA payroll deduction. The first, OASDI, is named for the retirement benefits of those retirees who made contributions to the Social Security system while they were working. The other, named Hospital Insurance (HI), is also known as the Medicare tax. Since 1990, the overall rate has been 7.650 percent for employees and employers, with 6.2 percent dedicated to OASDI and 1.45 percent for HI. The federal government temporarily reduced the Social Security withholding rate from 6.2 percent to 4.2 percent for 2011 and part of 2012, bringing the overall rate to 5.650 for the period.
Self-employed people are responsible for the half of the FICA tax withholding normally paid by employers as well as the half for employees. At publication, the FICA tax rate for the self-employed is 13.3 percent, with 10.4 percent for OASDI and 2.9 percent going to HI. This is scheduled to increase to 15.3 percent when the temporary rate reduction mentioned in Section 3 expires. Self-employed workers are allowed a deduction, in computing net earnings, equal to half of all FICA tax payments. This reduces their net taxable income.
Criticism of Regressive FICA Tax
Critics of the FICA tax have stressed its regressive nature. Social Security benefits are progressive; that is, those with low earnings receive benefits that make up a higher percentage of their total earnings than do those who earn more. The financing system for Social Security, by contrast, is regressive. Workers normally pay 6.2 percent (temporarily 4.2 percent) on wages up to a maximum of $110,000. Highly paid workers cease paying the FICA tax when their earnings pass the maximum, but the lowest-paid workers must pay the tax on every dollar they earn.
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