FICA taxes are not new, but few workers actually know what goes on when a fixed amount on their paychecks is taxed. On most U.S. Employees paychecks, most employees would see terms and conditions including the net amount of the check. The net amount is usually the amount after deduction of all FICA taxes.
Almost all of the taxes listed below would be mentioned under the 'hours and earnings' section on your paycheck. Many people wonder who is FICA and why they are stripping away 7.5% of your paychecks.
These are the most common type of taxes mentioned on your paychecks:
- Federal tax (and amount deducted through it)
- State tax (and amount deducted through it)
- Medicare, or "FICA" tax (and amount deducted through it)
- Social Security, or "FICA" tax (and amount deducted through it)
What are FICA taxes?
The tax amount deducted by the federal government from all your paychecks is done through the Federal Insurance Contributions Act, FICA. The amount first goes into the Internal Revenue Service, which then goes into the Social Security fund and the Medicare funds respectively.
In short, FICA is the driving engine for all your Social Security and Medicare leading to your retirement. All of the SSDI benefits are funding through amount collected from your FICA taxes.
Why are FICA taxes mandatory?
The taxes collected through FICA taxes combines the amount collected for both social security and Medicare under one platform, also known as payroll taxes. The payroll taxes are mandatory for all U.S. citizens regardless of how much they earn, except if they earn below substantial gainful activity.
Although both employers and employees have to pay them, a very small number of people do not pay their payroll taxes. Since the taxes are labeled as mandatory by the U.S. government, people who fail to pay these taxes may end up with severe consequences, such as tax penalties, resulting scrutiny and negative scenarios.
- Backdrop to FICA taxes
While the FICA taxes are mentioned as social security and Medicare taxes on your paychecks respectively, they do not go directly to your social security. Instead it works more like a public fund, where you have to rely on your future generation of taxpayers for your social security claims.
The backdrop here is, most of the people on the verge of retirement in the U.S. today are more than the people currently in the workforce. With that being said, it means there is a deficit of taxpayers to the amount of funding needed to pay current social security claims. Although this problem seems not so grave today, it might get serious as more people reach retirement with lesser number of taxpayers available.
Lastly, FICA isn't just for social security 'disability' claims. The funding can also be used to pay for retirement benefits, survivor's benefits, dependent benefits and other social security benefits such as widow/widower benefits.
Determining whether you are on the right track with your Social Security taxes can be a cumbersome process. You may consult a disability attorney for legal guidance.