All About the Fedieral Insurance Contributions Act

By Ted Rollins , last updated June 7, 2011

FICA stands for the Federal Insurance Contributions Act, an American payroll tax. The tax is imposed on employers and employees in order to fund both Social Security and Medicare. The amount that one pays in payroll tax over the course of one's employment is tied, albeit indirectly, to the amount they receive in benefits as a retiree.

FICA is a reductive tax on income that is only imposed on the first $106,800 of wages, meaning that higher earners are not equally hit by the tax. Investment income isn't taxed by FICA either. In 2010, the FICA tax rate was 6.2% of gross income, leading to a maximum tax of just over $6,600 from FICA. This number is called the Social Security Wage Base, which increases each year relative to the Consumer Price Index. There are many exemptions from overpayment for those that are self employed, as well as people who change jobs over the course of a year. Some people complain about the regressive nature of the tax. The Social Security aspect of FICA is a flat tax on wage levels under the Wage Base. This means that people earning over the Wage Base pay a lower effective tax rate as their income increases. There are also worries over untaxed unearned income, like gains from stocks and capital gains. In higher income brackets, a high percentage of earnings can come from these sources. By failing to tax these sources, some say, the tax law puts an unfair burden on those who actually need the benefits from FICA. Of course, as with any argument, there are many on the other side.

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In the United States, FICA, which stands for the Federal Insurance Contribution Act of 1935, is a payroll or employment tax that is levied against all American ...
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