Today I want to talk about FICA taxes. I know…it sounds boring. But it’s really important to understand this because it’s the FICA taxes that serve as your admission ticket to Social Security and Medicare benefits.
Have you ever looked at the federal income tax brackets and wondered why your taxes are so much higher than the rates published by the IRS? That’s because the federal income tax is a relatively small part of the overall taxes that most people pay.
If you take a close look at your paystub you’ll see the deduction from gross pay due to federal withholding. Depending on your state, you may also see state withholding.
If you keep moving down you’re going to see a line for FICA taxes. These are the taxes that you contribute to the federal government to pay current recipients of social security and Medicare and FICA stands for Federal Insurance Contributions Act.
Now this could be in two lines. One for Social Security and another for Medicare. Or the Social Security portion could be labeled OASDI for the Old Age Survivors Disability Income fund. Whatever it says, there is a strong likelihood that you’re paying the tax.
There are a few occupations groups that do not pay FICA, but 96% of all workers do pay it and it is not optional.
Breakdown of FICA
So, I want you to understand what this tax is and how it gets paid. It has two components to it:
- The Social Security portion. This is also the largest part of Social Security. The total is 12.4%. However, that is limited to the first $132,900 in wages for 2019. The limit of $132,900 does increase every year, but you do not pay the 12.4% on your wages once you cross this limit. Also, you only pay for half of this amount. Your employer pays the other half. Unless you’re self-employed…then you pay the entire amount.
- The Medicare portion. This is a total of 2.9% in taxes and is also split 50/50 between the employee and employer. This means that in total, 15.4% of your wages are paid in to the social security and medicare.
I hope that next time you look at your paycheck you’ll have a better understanding of what those lines mean and what they do.
Before we go I want to thank you for taking the time to get informed. So many people just float into retirement hoping everything will work out. Sometimes it does, but sometimes a lack of planning can ruin what should be your best years. This is your retirement! Please continue to stay informed!
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