FICA tax or Social Security tax, to be precise, is a tax that is deducted from the earnings of every working American. This tax is an essential aspect of a worker’s payroll and is a legal obligation that every employer must follow. The funds from this tax are primarily used to provide social security benefits to retired citizens, individuals with disabilities, and widowed spouses. This article will cover everything you need to know about the FICA tax, including its history, how it works, who pays it, and the benefits of contributing to this tax.
History of FICA Tax
The Social Security Act was created in 1935, with the aim of providing financial assistance to retired Americans. The act was put into effect by President Franklin D. Roosevelt and was signed into law on August 14th, 1935. Under the act, every worker was required to contribute 1% of their income to the Social Security program. At the time, the earnings were capped at $3,000 per annum.
Over the years, the Social Security program has undergone numerous changes and has increased its benefits several times. In 1939, the Social Security Act was amended to include widowed spouses and children. In 1950, disability insurance was added to the Social Security program. Currently, the FICA tax is a significant revenue source for the United States government, with a total revenue of $1.24 trillion in 2019.
How FICA Tax Works
As mentioned earlier, FICA tax, also known as Social Security tax, is a tax that is deducted from the earnings of every working American. The tax is calculated as a percentage of the gross earnings of an employee, and employers are required to match their employees’ contribution. The FICA tax rate for 2021 is 6.2% for employees and 6.2% for employers, for a total of 12.4%.
Currently, there is a cap on the earnings that are subject to the FICA tax. In 2021, the cap is set at $142,800. This means that any income earned above this amount is not subject to the FICA tax. For self-employed individuals, they are required to pay both the employer and employee share of the FICA tax, amounting to a total of 12.4%.
Who Pays FICA Tax
FICA tax is paid by both employees and employers in the United States. As an employee, the FICA tax is automatically deducted from your paycheck before you receive it. As an employer, you are responsible for making sure that the FICA tax is deducted from your employees’ paychecks and remitted to the government on their behalf.
However, some employees are exempt from paying FICA tax. For instance, if you are a student enrolled in a qualified work-study program, you may be exempt from FICA tax. In addition, if you work for a religious organization that has adopted a waiver program, you may not be required to pay FICA tax. The waiver program is a provision in the tax code that exempts certain religious organizations from paying FICA tax.
Benefits of Contributing to FICA Tax
Contributing to the FICA tax may seem like a burden to some workers. However, the benefits of contributing far outweigh the costs. Here are some of the benefits of contributing to FICA tax.
1. Retirement Benefits
One of the primary benefits of contributing to FICA tax is that it provides retirement benefits to eligible Americans. When you reach the age of 62, you become eligible to receive retirement benefits under the Social Security program. The amount you receive is based on the number of years you have worked and the amount of money you have paid into the program.
2. Disability Benefits
Another benefit of contributing to FICA tax is that it provides disability benefits to eligible Americans. If you are unable to work due to a disability, you may be eligible for disability benefits under the Social Security program. The eligibility for disability benefits is determined by the Social Security Administration (SSA), and the amount you receive is based on your earnings history.
3. Survivors Benefits
In addition to retirement and disability benefits, the FICA tax also provides survivors benefits to eligible Americans. If you have a spouse who has passed away, you may be eligible to receive survivors benefits under the Social Security program. The amount you receive is based on the earnings history of your spouse.
4. Medicare Benefits
Another benefit of contributing to FICA tax is that it provides Medicare benefits to eligible Americans. Medicare is a federal health insurance program that is available to Americans who are 65 years of age or older, people with certain disabilities, and those with kidney failure. The benefits provided by Medicare include hospital insurance, medical insurance, and prescription drug coverage.
FICA Tax and the Self-Employed
For self-employed individuals, the FICA tax works differently than it does for employees. As a self-employed individual, you are responsible for paying both the employer and employee share of the FICA tax. This means that your total FICA tax liability is 12.4%. However, there are deductions that are available to self-employed individuals that can help reduce their overall tax liability.
One such deduction is the self-employment tax deduction. This deduction allows self-employed individuals to deduct 50% of the self-employment tax they pay from their income tax liability. In addition, self-employed individuals may also be eligible for other tax deductions related to their business expenses, such as office rent, equipment, and travel expenses.
FICA Tax and Nonresident Aliens
Nonresident aliens who work in the United States are also subject to the FICA tax. However, there are certain exemptions and exceptions that are available to nonresident aliens. For instance, if the nonresident alien is an international student who is enrolled full-time in a qualified academic program, they may be exempt from paying FICA tax. In addition, if the nonresident alien is from a country that has a totalization agreement with the United States, they may be exempt from paying FICA tax.
Conclusion
In conclusion, FICA tax, also known as Social Security tax, is an essential tax that is deducted from the earnings of every working American. The tax pays for retirement benefits, disability benefits, survivors benefits, and Medicare benefits. FICA tax is paid by both employees and employers, and self-employed individuals are required to pay both the employer and employee share of the tax. Nonresident aliens who work in the United States are also subject to the FICA tax, although certain exemptions and exceptions are available to them. Overall, contributing to FICA tax is crucial as it provides a safety net for eligible Americans in their retirement years.
The United States government allows for several kinds of tax credits and deductions that can be claimed as exceptions to the general necessity to pay the fees required of the Federal Insurance Contributions Act (FICA). These tax credit exemptions are applied to various kinds of professions. These eligible professions may be determined in slightly different ways according to the state where the claimant lives.
The categories under which tax credits and deductions may be claimed from the obligatory FICA Social Security payments can generally be found in fields which are not known or designed to deliver high profit margins to their operators or participants, such as institutions involved in education past the level of college.
On a similar note, medical students actively engaged in trying to obtain certification as physicians can also be extended a tax credit through the lapsing of a requirement to pay a Social Security fee.
For instance, graduate students can generally claim a tax credit, as can students in general who are also employed by their educational institution, such as through a student work program or some other kind of employment which does not alter the primarily educational basis of their position.
People who are employed by organizations in academe without being students of those organizations will generally not be covered under tax credits and deductions from the FICA Social Security mandated payments in that their relationship to their employer does not differ appreciably from that of that of any employer and employee in the commercial world.
Institutions which are not by nature focused toward profits but which are still generally not eligible for tax credits and deductions in terms of the obligatory payments for FICA are those defined as charitable or non-profit groups.
The ability to secure tax credits and deductions for people who are not citizens of the country will generally vary according to the exact nature of their status in the country. For example, legal aliens who are also considered residents of the United States will generally not be able to claim any kind of tax credits to prevent them from having to pay the Social Security tax.
In fact, generally such “resident aliens,” as the government refers to such people, are treated as holding effectively the same status as full-fledged US citizens for the purposes of the country’s system of taxation.
On the other hand, legal aliens living permissibly inside of the United States without being considered residents can be allowed to receive tax credits and deductions from the mandated Social Security payments if they are in the country for the purpose of pursuing studies on at least a part-time basis.
