Driven by the suffering of the Great Depression, the FICA tax was originally created to fund an “old age” Social Security system. Signed into law by Franklin Roosevelt in 1935, his intention was to create a self-financing program rather than one dependent on federal revenue. When Medicare was created in 1965, this was added to the tax as well.
Do you have to pay FICA taxes?
As an employee in the US, you are most likely subject to FICA tax. While there are some exemptions, such as certain religious figures or groups, most employees must pay into the system.
FICA is a non-elective tax that is automatically withheld from your paycheck throughout the year, so you never have to worry about it when tax returns are due.
FICA tax vs. income tax
Understanding the different types of taxes can be confusing, especially since the United States has so many different types. So what is the difference between FICA and income tax, and how does it affect you?
Bottom line: almost everyone pays the FICA tax; Whether you owe income taxes, meanwhile, varies, depending on income.
|FICA tax||Income tax (federal or state)|
|Tax to fund Social Security and Medicare programs||It is used to generate general revenue for the federal (or state) budget.|
|Social Security tax is capped based on how much you earn; Medicare tax is not||Tax brackets determine the amount of taxes you owe each year|
|Automatically withheld from your paycheck||You can choose to increase or decrease your exemptions, but you may have to pay taxes or penalties on your annual tax return.|
Pros and cons of FICA taxes
- Mandatory tax
- No limit to taxable earnings
- Funding Services You Will Probably Need One Day : Almost everyone will have to rely on Social Security services one day, whether they are disabled or just elderly. You are paying into a fund whose profits you will use later.
- Worry-free tax automatically collected from your paycheck : Unlike federal or state taxes, FICA tax is automatically withheld from your paycheck , so you never have to worry about it.
- Mandatory Tax : With very rare exceptions, this tax is mandatory for US employees, whether they use your services or not.
- No Limit on Taxed Earnings : While the Social Security portion of FICA taxes is capped each year, the Medicare portion does not. There is also an additional 0.9% Medicare tax for wages over $ 200,000 as a single taxpayer.