What is the FICA Tax?
Let’s talk about FICA taxes. I know you’re excited. I can see it. You know oftentimes people say, yeah, that’s one of those line items that I see a deduction on my payroll or my paycheck on a weekly or bi-weekly basis, whenever you may get it. But what exactly is it and what does it do? So FICA stands for Federal Insurance Contribution Act and it was passed in 1935. So this is primarily what is put into place to provide a retirement savings and insurance program for working Americans. Really, it’s the primary funding source of Social Security. So you have out of your pay basically 6.25% in 2022 coming out for Social Security and then 1.45% of your wages for Medicare. So when you look at those two combined, about 7.65% is coming out. Now if you’re an employee, your employer is paying that much on their side as well. So you know kind of double that and that’s what’s going towards basically your record, right? So there’s different limits on this as well. So for the first $147K earnings annually, is taxed that amount. After that amount, if you are fortunate enough to make more than that, the Social Security part falls off. So that $147K isn’t taxed anymore. So if you are a wage earner where you have that, you know maybe later in the year as you earn more than that, you’ll actually set your net pay bump up slightly because that part isn’t being taken out anymore. The Medicare piece stays there. And actually if you’re single and you make over $200K, married over $250K, .9% gets tacked on the 1.45% after that and you actually pay a little bit more of that Medicare if you’re high wage earner and you get into that. Now some folks don’t, I shouldn’t say that, they may be exempt from having to pay this. Some religious affiliate employees and also some state and federal workers that have pension entitlements may not be subject to have these payments. So there are some employees that that may not be being deducted. However, for most folks if you’re working in the private sector, then you’re going to have that. If you’re self-employed, you’re paying your employee portion and your business portion. So you’re paying both of that. So once again, kind of an interesting piece of what is that line item when you look at your paycheck and what is it going to do? So hopefully that was helpful. And once again, kind of really at the end of the day, we’re looking at Social Security and it’s a big piece for retirement. And hopefully you’re using that to the best of your ability and that’s built into your retirement income plan. If you have questions about any or this or need help with your retirement income plan, we’d love to talk to you for a free, no obligation visit here at Centennial Wealth Advisory.