Legal Definitions - Federal Insurance Contributions Act

The Federal Insurance Contributions Act, commonly known as FICA, is a United States federal law that mandates the collection of payroll taxes from both employees and employers. These taxes are specifically designated to fund the Social Security and Medicare programs, which provide retirement, disability, and healthcare benefits to eligible Americans. Essentially, FICA ensures a steady stream of funding for these crucial social safety nets by requiring contributions based on an individual's earnings.

• Example 1: A Salaried Employee's Paycheck

  Sarah works as a marketing specialist for a tech company. Every two weeks, when she receives her paycheck, she notices a deduction labeled "FICA" or "Social Security and Medicare Tax." This deduction represents her portion of the FICA tax, which is automatically withheld from her gross earnings by her employer. Her employer also contributes an equal amount on her behalf, as mandated by the Federal Insurance Contributions Act, to fund her future Social Security and Medicare benefits.

• Example 2: A Small Business Owner Managing Payroll

  David owns a local bakery with five employees. When he processes payroll each week, he is responsible for calculating and withholding FICA taxes from each employee's wages. In addition to these withheld amounts, David, as the employer, must also contribute an equivalent amount from his business's funds for each employee. He then remits both the employee and employer portions of these FICA taxes to the government, fulfilling his obligations under the Federal Insurance Contributions Act to ensure his employees are contributing to and covered by Social Security and Medicare.