What Is the FICA Tax?

FICA stands for the Federal Insurance Contributions Act. This law outlines that taxes should be withheld from paychecks and used to fund the Social Security and Medicare programs. Both employees and employers are impacted by the FICA tax. Here's a look at how the FICA tax is calculated.

What Is FICA?

The law that created the FICA tax was passed in 1935. The funds are used to provide a retirement savings and insurance program for working Americans. "FICA taxes are the primary funding source for Social Security benefits," say Ben Dobler, a certified financial planner and founder of Stewardship Financial Counsel in Cincinnati. In addition to Social Security, FICA taxes are funneled into the Medicare program.

The FICA tax is designed to provide support for retirees who qualify for benefits. "As you work and earn, and then pay your FICA taxes, you earn credits for Social Security benefits," says Michael Hammelburger, CEO of Bottom Line Group in Baltimore. To earn a Social Security credit in 2021, you'll need to earn at least $1,470 and pay FICA taxes on that amount. Every year, you can receive up to four credits. Once you have earned at least 40 credits, you will be eligible to receive Social Security retirement benefits beginning at age 62.

Paying FICA taxes also qualifies you for disability and life insurance benefits. If you become disabled, you may be eligible for Social Security disability benefits if you meet certain criteria and satisfy the minimum number of Social Security credits for your age. If you die, Social Security survivor benefits may also be available for your eligible family members, such as minor children and a surviving spouse who cares for young children or is age 60 or older.