FICA TAX Meaning and
Definition
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FICA tax, also known as the Federal Insurance Contributions Act tax, is a payroll tax imposed in the United States that is collected to fund two major social insurance programs: Social Security and Medicare. The tax was established in 1935 under the Social Security Act and expanded in 1965 to include Medicare.
The FICA tax is imposed on both employees and employers. It is calculated as a percentage of an employee's wages or salary, up to a certain income limit. As of 2021, the Social Security portion of the tax is set at 6.2% of an employee's earnings, while the Medicare portion is 1.45%. The employer is also responsible for matching these amounts, hence contributing an equal percentage to the total tax.
The funds generated from the FICA tax are vital for financing Social Security retirement benefits, disability insurance, and survivor benefits. It also helps fund the Medicare program, which provides healthcare coverage for elderly and disabled individuals.
The FICA tax is considered a regressive tax because it has a greater impact on low-income earners, as the tax rate does not increase with higher incomes. Additionally, it is mandatory for most employees and employers to pay this tax, with few exceptions. However, some individuals may be exempt from the FICA tax, such as certain nonresident aliens, religious sect members, or certain government employees covered by a pension plan.
Common Misspellings for FICA TAX
- dica tax
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Etymology of FICA TAX
The term "FICA tax" is an acronym that stands for Federal Insurance Contributions Act tax. The etymology of this term can be traced back to the legislation that brought it into existence. The Federal Insurance Contributions Act (FICA) was enacted in 1935 as part of the New Deal policies of President Franklin D. Roosevelt. The act was aimed at providing a social insurance program to support retired workers, survivors, and people with disabilities. The FICA tax refers to the payroll tax that funds these social insurance programs, primarily Social Security and Medicare.
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