Computing FICA Taxes

FICA stands for the Federal Insurance Contributions Act of 1935. FICA taxes are used solely to fund Social Security or Old Age Survivors, and Disability Insurance (OASDI) and Medicare. FICA taxes are separate from federal income tax.

Old Age Survivors, and Disability Insurance (OASDI) is a federal program that provides income and financial support to retired individuals, survivors of deceased workers, and individuals with disabilities. Here’s a breakdown of what each component of OASDI entails:

• Old Age Insurance: This component of OASDI, commonly known as Social Security, provides financial benefits to retired individuals who have reached the eligible age and have accumulated enough work credits throughout their working years. These benefits help provide income during retirement.
• Survivors Insurance: The survivors’ component of OASDI provides benefits to the surviving family members of deceased workers. This includes surviving spouses, children, and dependent parents who may be eligible for financial support in the form of survivor benefits.
• Disability Insurance: The disability component of OASDI offers financial assistance to individuals with disabilities who are unable to work and have earned enough work credits. These benefits aim to provide income replacement and support for individuals facing long-term disabilities.

Medicare taxes go towards funding the Medicare program, which is a federal health insurance program primarily designed for individuals aged 65 and older, as well as certain younger individuals with disabilities.

Taxes for OASDI and Medicare amounts to [latex]7.65\%[/latex] of your gross pay, which is withheld from your paycheck automatically. Your employer is required to match the [latex]7.65\%[/latex] amount. Of the [latex]7.65\%[/latex], [latex]6.2\%[/latex] goes to OASDI, and [latex]1.45\%[/latex] goes to Medicare.

However, OASDI program limits the amount of earnings subject to taxation for a given year. This limit changes each year with changes in the national average wage index. This annual limit is known as the contribution and benefit base. As of 2023, this base is [latex]$160,200[/latex]. Medicare tax, on the other hand, applies to the entirety of your gross income. These rates are different if you are self-employed.