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