There's a big difference between gross pay and net pay, as anyone who's ever gotten a paycheck can attest. A big part of your pay gets withheld for various purposes, including federal and state income taxes and your employee share of work-sponsored health insurance premiums.
One withholding amount taken from your check goes toward something called FICA. Even if you have no idea what it is, the amount involved can be big, and it's important to understand exactly what it is and where it's going. Let's look more closely at FICA and how much it could cost you in 2019.
What is FICA anyway?
FICA is an acronym, standing for the Federal Insurance Contributions Act. That federal law establishes how much employers are responsible for taking out of your pay in order to provide funding for certain government programs.
Part of your FICA money goes toward Social Security payroll taxes, while the rest covers the taxes charged by Medicare. Some employers break out FICA into those two separate categories, in which case you might not even see the word FICA on your paycheck. But regardless, that money covers your required contribution that in turn typically entitles you to receive money from those programs in retirement.
How much do I have to pay for FICA?
The rates on the two main parts of FICA are different. Further complicating matters is that the amount of money subject to tax can also differ between the two components.
With the Social Security part of FICA, a 6.2% tax applies to earnings up to $132,900. Above that amount, you no longer have to pay any Social Security payroll tax. That works out to a maximum amount in 2019 of $8,239.80. Those who make more than $132,900 will see their take-home pay suddenly rise once they reach the maximum Social Security earnings that are subject to tax -- because above that amount, employers must stop withholding that part of the tax.
However, Medicare tax isn't subject to an earning limit. Unlimited wages and salaries are subject to the 1.45% withholding tax. That means that for some high-income earners, even though the Medicare tax rate is lower, total Medicare tax liability can end up being greater because of the fact that there's no cap on how much income to which that 1.45% tax applies.
One thing to note is that if you're an employee, your employer matches what you have withheld. FICA imposes an obligation on employers as well to pay money toward federal programs out of their own pockets. That's the reason why self-employed individuals end up paying both halves of FICA, amounting to a 12.4% total tax on Social Security and 2.9% on Medicare.
What's ahead for FICA taxes?
There haven't been changes to FICA taxes for a long time, with the current tax rates dating back to the 1990s. The only thing that has changed gradually is the wage base maximum on the Social Security tax portion of FICA, because it's subject to adjustments every year based on inflation.
That said, there's the potential for major changes in the long run. Many are concerned about Social Security's looming funding crisis, and one proposed solution has been to consider lifting the wage base maximum. If that happens, FICA taxes for the wealthy could soar. Yet there's substantial opposition to that move, largely because until now, Social Security benefits have been tied to wages, and few support the idea of taxing the wealthy in exchange for paying them larger monthly checks in retirement.
For now, though, legislative gridlock in Washington is likely to continue. That means that the status quo will likely survive for the foreseeable future, with both parts of the FICA tax remaining in place in their current form.
Be aware of FICA
It's easy to ignore the money that gets withheld from your paycheck, since you never actually get to use it. But understanding where FICA withholding goes is crucial to seeing your contributions to Social Security and Medicare -- along with what they mean for the nation as a whole.