| What does FICA stand for? | | | | have to pay taxes. That means no more contributions |
| FICA stands for the Federal Insurance Contributions | | | | to FICA . Now, after the excitement settles down we |
| Act. The history of the act reverts back to the year | | | | must decide what to do with our extra income. Let's |
| 1935, when the government implemented the social | | | | pretend we work a part time job, because we are still |
| security program. A provision to include social security | | | | studying to get our degree in economics. Fortunately, |
| taxes was included in this act. However, due to | | | | we have a decent job paying $11 bucks an hour |
| concerns over the constitutionality of the 1935 act, | | | | assisting an up and coming lawyer. Typically, we put in |
| there were amendments made and the provision for | | | | a 25 hour work week, meaning we make about $275 |
| collecting social security taxes was moved to the | | | | a week. That is exactly $1100 dollars every month. If |
| Internal Revenue Code in 1939. At this time it was | | | | we made $1100 every month, the FICA taxes we |
| renamed the Federal Insurance Contributions Act. | | | | would normally contribute would break down like this: |
| What is FICA exactly? | | | | Social Security: $1100 X 6.2% = $68.20 |
| The Federal Insurance Contributions Act authorizes the | | | | Medicare: $1100 X 1.45% = $15.95 |
| IRS to collect taxes for the benefit of the social | | | | $84.15 |
| security program. Intuitively, we might think of these | | | | So by not having to pay taxes, particularly FICA, we |
| taxes as social security taxes, but more commonly | | | | would increase our cash flow by $84.15 each month. |
| they are referred to as FICA taxes. These FICA | | | | Now the fun begins. What are the ways we could |
| taxes serve as deposits into the federal social | | | | spend our hard earned cash. I know what I would do. I |
| insurance program we think of today as Social | | | | would begin by signing a lease agreement with TiVO |
| Security. | | | | for one of their popular digital video recording options. |
| According to FICA, you must contribute 12.4 percent of | | | | With this contract, I allocate $12.95 of my savings each |
| your earned income up to the predetermined limit of | | | | month to the TiVO service. To complement my new |
| contributions, and another 2.9 percent must be | | | | DVR, I would go ahead and splurge on the best |
| contributed to Medicare. It is important to note that | | | | satellite service in the area. I estimate the cost would |
| there is no earnings limit on the Medicare portion of the | | | | come in around $50 a month. As a college student I |
| tax, and thus in practice one is taxed 2.9 percent of all | | | | would likely be coerced into filling the music void in my |
| earned income, regardless of your total income level. | | | | life by signing up for an all you can consume digital |
| For those working for hourly wages the tax levels are | | | | music subscription service, running approximately $9.95 |
| different. Hourly employees contribute 6.2 percent for | | | | a month. Just like that I am only left with about $10 |
| Social Security and 1.45 percent for Medicare. | | | | more in cash flow each month, which could easily be |
| Hopefully you noticed that this is just half of the | | | | spent seeing one or two movies every month. |
| standard rates. There is good reason for this as your | | | | |
| employer is required to pay the other half of the rate | | | | Snap Back to Reality |
| for Social Security and Medicare contributions. In other | | | | Well, unfortunately life is not that easy. We do have to |
| words, for those working at hourly wages, the | | | | pay FICA, and the contributions we make go a long |
| employer must match the employee contributions. | | | | way in improving the living conditions of others. So for |
| | | | now, plan on paying those FICA taxes, or should I say |
| How would you spend your FICA? | | | | contributions. |
| Let's imagine we live in a perfect world, and we don't | | | | |