Payroll taxes are the second-largest source of revenue for the federal government that funds social insurance programs such as Social Security and Medicare.
Federal Insurance Contribution Funds Taxpayers’ Social Security and Medicare (PHOTO: Biz2Credit)
What Type Of Tax Is Withheld From Payrolls
The Federal Insurance Contributions Act (FICA), is a law that was enacted back in 1935 and it mandates a payroll tax on the paychecks of employees. The accumulated money will be used to fund the Social Security and Medicare programs.
From the beginning, the idea behind the act was that working people would contribute a certain amount of each of their paychecks throughout their working years to fund these programs. This would benefit them because later in life, they would have both financial and health benefits. A great idea that has been a constant for all workers in America since it was created.
Moreover, The Self-Employment Contributions Act (SECA) of 1954 requires the self-employed to pay taxes from their net earnings to help fund Social Security and Medicare programs. Hence, this program is a cycle of life type of deal because the taxes people pay under FICA and SECA help senior citizens right now. So if you are still young and paying for the program, you are supporting senior citizens during their retirement. By the time you are their age, younger workers who are paying those taxes by then will be helping you during your retirement years.
Let’s Understand More About FICA
In 1935, the United States Congress passed the Federal Insurance Contributions Act, known as FICA. Its purpose was to collect contributions to fund the new Social Security program established by the administration of President Franklin D. Roosevelt in the same year. These Social Security programs provide benefits to all retirees, children, surviving spouses, and disabled citizens. The wage base for Social Security taxes on earnings is set at $160,200 for 2023.
Furthermore, FICA contributions are fundamentally withheld from a wage earner’s gross pay, the amount depends on how much they earn. All employers have to match the FICA taxes paid by their employees. Wage earners are not able to opt out of paying FICA taxes, they are mandatory for every single worker. The benefits paying these FICA taxes bring are still ongoing to this day.
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