Imagine for a moment that you work hard every day, carefully plan every expense, buy the cheapest, and try to save as much of your salary as possible each month. And when the day comes to receive your money at the end of the month, bam! You notice that there is a percentage that has magically disappeared from it.
Among the deductions made from all payments, there is a term that many of us have heard, but that we do not fully understand. We are talking about FICA, do not worry because, although it may generate frustration, behind these four acronyms there is a vital purpose for our future. In this article, we are going to tell you what the FICA tax is, not only so that you understand why it affects your salary, but also so that you appreciate how it contributes to your future.
What is the FICA tax?
This tax, which stands for the Federal Insurance Contributions Act, is a mandatory contribution that Americans have to pay to fund two essential programs in the country: Social Security and Medicare.
These programs ensure retirement income and health care (respectively), not only for you and your future but for those who already depend on them today.
How is the tax divided?
The money you contribute to this tax is divided as follows:
- 6.2% of your gross salary goes to a fund that pays monthly income to retirees, people with disabilities, and dependents of deceased workers, or Social Security.
- 1.45% of your gross salary goes to fund Medicare medical services for people over 65 and individuals with disabilities.
There is an additional Medicare tax, where if you make more than $200,000 a year (or $250,000 if you file jointly) an additional 0.9% will apply.
In total, each American worker contributes 7.65% of their salary, while of course, the employer contributes the same amount.
If you are self-employed, you will cover both percentages, so you will add up to 15.3% (although you can write it off as a business expense, which is a good thing!)
And can you save with the FICA tax?
First of all, you have to start thinking that the FICA is not an expense, but an investment, and that, when you retire, you want a program to support it, right? So, all salaried workers and their employers must pay it. In the case of employers, they put in every dollar that you have also put in so that the pension system is supported by the support of all people who carry out work activities.
Are there any exceptions to this tax?
Of course, as with all taxes, there is a part of the population that is still “free” from this tax, and that is, if you work for the institution where you study (normally universities) you could be exempt from paying this tax.
On the other hand, if you work in international governments (consulates or similar) you will not have to pay this tax.
Lastly, religious entities can also request an exemption from this tax.
Why is the FICA so important?
Because, although it is an economic burden for all workers, it is essential to maintain collective well-being and, thanks to this system, millions of people have guarantees of a minimum living wage and medical care when they need it most. In addition, it is also your future in a few years. It is a way to continue protecting the financial support of millions of residents of the United States, so we should not see this small percentage as an expense, but as a protection, first for ourselves, and then for our neighbors.