American Civics
FICA Tax How the FICA tax is calculated and what it stands for
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- In the first video on social security, I keep talking about
- how the tax that you pay for social security is called
- the FICA tax.
- What I want to do in this video is
- one, let you know what FICA actually stands for
- and then think a little bit how it is actually calculated.
- So first, what does it stand for?
- Literally it stands for
- (while writing) Federal... Insurance... Contributions... Act...
- That's the acronym.
- So it'd be FICA and some people will call it FICA tax.
- FICA tax.
- This isn't just to support social security
- or to be technically correct to support the old age survivors and disability insurance.
- It's also... part of FICA tax is for that and part is for Medicare
- So to make things clear... So it's the part of our social security
- or what we associate with social security which is really the OASDI
- did I get that right? OASDI...
- So, part of it is for social security and then that part is 12.4%... of the gross salary
- but half of that is paid for by the employer and half is paid by the employee.
- We'll do a calculation in a second
- so 6.2% and 6.2%.
- The part is paid by the employer - that's part of the payroll tax
- stuff that the employer pays above and beyond the gross income that they're giving to the employee
- We'll do that calculation in a second.
- The other thing that FICA tax is used for is Medicare...
- Medicare...
- This is for total amount of 2.9% of the employee's gross salary
- or 1.45% from the employer as part of the payroll tax,
- and 1.45% from the employee...
- If you add these two things up you get 15.3% total FICA tax.
- 15.3%... once again half is paid by the employer and half is paid by the employee.
- Now let's just do calculations so that it makes a little more tangible sense
- of what I am even talking about with this FICA tax.
- So, let's imagine that you make 100,000$ a year
- and it's a nice number because it makes the maths easy.
- Then your employer... employee... Let me write it like this...
- Employer... employee...
- So, for social security... your employer will contribute 6.2% of this.
- So above and beyond paying the 100,000$ gross salary, they will also pay 6.2%
- or 6,200$... The employee will also pay 6,200$
- and that will be deducted from their paycheck so what they get net of 6,200$
- and then for Medicare... we'll do that in pink...
- Then for Medicare the employer will contribute 1,450$
- once again above and beyond the gross salary of 100,000$
- and the employee will pay 1,450 out of their gross salary.
- So the total amount that is paid by the employer...
- Total amount paid by the employer...
- ...is 7,650$ in payroll tax for this one employee
- and the total amount by the employee is the exact same amount: 7,650.
- So just to be clear, if you want hire an employee
- and pay them a 100,000$ in gross salary
- you actually have to set aside a 100,000$ and 7,650.
- So the employer... the total that the employer is paying...
- the employer... the total that they're paying... total paying...
- Or let me just think of it this way...
- The total that the employer has to set aside...
- If you include the salary is going to be... 107,650$ so they can cover the gross salary
- plus this payroll tax over here.
- The net that the employee is getting...
- The net that the employee is getting...
- and once actually this isn't even the net, I shouldn't call it the net...
- the employee is getting after paying FICA taxes is going to be a 100,000 minus 7,650
- but I won't even write that number down
- oh, I mean, what is that? That's... 92,350$
- because that's before paying just the traditional federal income tax
- and the traditional state income tax
- so that's gonna cut it down a good bit
- so the employee is gonna take home probably on the order of 60,000-70,000$
- so above and beyond this thing right here.
- So even if the employer is paying this much, the employee is getting a lot less
- in terms of what they get to take home.
- Now one thing that I think it is worth mentioning
- is on like traditional federal income tax...
- in traditional federal income tax your first several tens of thousands dollars you make
- are not taxed and as you go up the brackets
- each incremental dollar as you enter one bracket or another
- you start to pay a higher percentage on those.
- The FICA tax is actually very different
- some people would even call it a regressive income tax.
- That's because you only pay the FICA tax on the first 160,000
- and at least this is the number in 2011
- you only pay on the first 160,800$.
- So someone who makes 200,000$ will pay the same FICA tax
- as someone who makes a 160,800$.
- So you only pay it on the percentage below that
- and the reason why is it that the person making 200,000$
- will get the exact same benefits as well as the person who makes 160,800$
- and this number... essentially they tried index it roughly to inflation
- so it will go up over time... but to some degree someone who makes, let's say, below this threshold
- is gonna pay this percentage between them and their employer
- is gonna pay this percentage of their income.
- While someone who makes much more than this will have to pay a smaller percentage of their income
- but they'll end up getting the same benefits.
- And so, that's one reason why it is considered regressive
- is that as you make more money you're paying a smaller percentage of your income on FICA tax
- and the other reason why it's considered regressive is actually on the benefits side.
- Because obviously someone who...
- if you have two people receiving social security benefits...
- so you have this person, so when this is when they turn 65...
- let me put it this way...
- So let's say that you have two people... they worked their whole lives
- and let's say they both retire at 65... although that the retirement age is increasing...
- It's slowly being indexed up
- and then they retire.
- It's known that the wealthier people...
- And there's also a demographic space on race and things like that...
- but it's known that wealthier people actually live longer
- so they actually get benefits for a longer period of time.
- So they're actually able to get their benefits for longer.
- So it depends when you fall into it likely, that even though there's this cap
- someone higher up the income chain also probably did pay more into it
- but they're also getting a bigger check for paying more into it
- the check that you eventually get is based to some degree on what level of FICA tax
- you were paying and they're very well likely to be able to collect this payments for longer
- than someone who maybe doesn't have quite the same... I guess, quality of life
- and doesn't actually live as long.
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