What Is FICA on My Paystub?
By Davis Clarkson , July 27 2020
"Why is my paycheck so low?" "Are all of these deductions necessary?" Do you ask these questions every time you get paid? Many people wonder this same thing, and these are all good questions to ask. It's good to understand what taxes you're paying, why you have to pay them, and what they're for.
While there are many taxes you'll see listed as deductions on your paystubs, a good place to start is by asking “What is FICA on my paystub?" If you're wondering what FICA is, we will help you understand why your employer takes this deduction, what it is for, and where this money goes.
The Origins Of FICA
FICA stands for the Federal Insurance Contributions Act, originally created in 1935 by President Franklin Roosevelt. Though, it was not labeled FDIC. Instead, it was simply called the Social Security Act (SSA). The purpose of creating this act was to provide elderly and retired individuals with money for retirement.
While it was originally designed as a voluntary program, it is no longer voluntary. Anyone who works and earns income pays into this fund.
What Is FICA On My Paystub For?
The money the U.S. government collects from FICA taxes is used primarily for two main things. FICA covers Social Security retirement payments but also covers premiums for Medicare — a federally funded healthcare program for seniors.
1. Social Security Payments
Social Security is a program run by the government that offers money to people after they retire or for people who qualify for benefits for a different reason. This program helps approximately 61 million people each year by sending them checks to help them have money to use for their living expenses. When you retire, you can collect money from Social Security as well. Your family might also be entitled to collect money from this department if you pass away before you are eligible to begin receiving money from it.
2. Medicare Insurance
Medicare is a health insurance program designed primarily for people who are retired or elderly. The money you contribute out of each paycheck goes to help these individuals receive the medical care they need and access to the prescriptions they require. Approximately 15% of the population in the U.S. currently receives benefits from Medicare.
You cannot opt-out of Social Security benefits or Medicare as a way of avoiding these deductions. You have to pay them if you work. You can opt-out of receiving the benefits they offer, though. If you retire and have plenty of money saved up, they do not require you to use these benefits. In fact, you must apply for them to use them.
Regardless of your choice, you are required to pay FICA taxes throughout your entire working career.
The Rates You Pay for FICA
FICA taxes are designated for the two programs listed above, and that is why you will see two different deductions on your paystubs. The FICA taxes you pay for Social Security are equal to 6.2% of your gross earnings each pay period. You will pay this tax on all your earnings up to $137,700. When you reach this amount of money earned, you no longer pay this tax.
The FICA taxes for Medicare are equal to 1.45% of your gross earnings. There is no cap on earnings for Medicare taxes. You will pay the rate on all earnings, and you will actually pay a higher rate if you earn a lot of money. For single people who earn over $200,000 and for married people who earn over $250,000, there are additional fees you Medicare taxes.
The one thing you might not realize about FICA taxes is that your employer is legally required to match the amounts that you pay. Therefore, your employer also pays 6.2% for Social Security and 1.45% for Medicare. Each time you receive a paycheck, your employer withholds the necessary amounts for your portion of FICA taxes. When the employer pays these to the government, they also add in their portion.
So the amount you are actually contributing to both programs is double what you see withheld from your checks.
The Effects Of Self-Employment For FICA Taxes
When you are self-employed, there is one difference you should know about when it comes to FICA taxes. Instead of being responsible for paying the 6.2% to Social security, you would have to pay 12.4% because you would be responsible for your portion and the employer's portion. You would pay 2.9% total for Medicare for this reason.
If you are self-employed and want to start paying into FICA on a regular basis, you should start giving yourself regular paychecks if you don't already. You can do this by using a paystub maker which allows you a simple and effective way to make your own paychecks and paystubs. If you don't withhold these taxes on a regular basis, or any of the other taxes you are required to pay, you could end up with a huge tax bill when tax time comes around.
Additionally, you could owe incur penalty fines for not paying your taxes on a quarterly basis. It's always better to pay your taxes in a timely manner. It's easier for your budget and helps you prevent penalty fees.
Your Next Step
Now you understand the answer to the question, "What is FICA on my paystub?" Understanding the deductions you have on your paycheck is important so as to avoid any losses. Stay updated and tech-savvy and create an online stub now!