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Current time:0:00Total duration:7:30

Video transcript

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 about how it is actually calculated so first what does it stand for literally it just stands for Federal Insurance Federal Insurance Contributions contributions Act that's the acronym and so it'd be FICA and then some people will call it FICA tax FICA tax and 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 and so to make it things clearer so it's the part that is sort of Social Security or we associate a Social Security which is really the OASDI did I get that right Oh a oasdi so part of it is for Social Security and then that part is 12.4% 12% point four percent of the gross salary but half of this is paid for by the employer half is paid by the employee and we'll do a calculation in a second so 6.2 percent and 6.2 percent the part that's paid by the employee a year that's the 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 and we'll do that calculation a second the other thing that FICA tax is used for is Medicare Medicare and this is for total amount of 2.9 percent of an employee's gross salary or one point four five percent from the employer as part of the payroll tax and one point four five percent from the employee and if you add these two things up you get fifteen point three percent total FICA tax fifteen point three percent where once again half is paid by the employer and half is paid by the employee now let's just do a calculation so that it makes a little bit more tangible sense of what I'm 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 math easy and then your employer your employer employer employee let me write it like this employ your employee so for Social Security for Social Security your employer will contribute 6.2 percent of this so above and beyond paying the hundred thousand gross salary they will also pay 6.2 percent or sixty two hundred dollars or six thousand two hundred dollars and the employee will also pay six thousand two hundred dollars and that will be detected deducted from their paycheck so that what they get will be net of the sixty six thousand two hundred dollars and then for Medicare we do that in pink then for Medicare the employer will contribute one thousand four hundred and fifty dollars once again above and beyond the gross salary of $100,000 and the employee will pay one thousand four hundred fifty out of their gross salary so the total amount that is paid by the employer total amount paid by the employer is seven thousand six hundred and fifty dollars in payroll tax for this one employee and the total amount by the employee is the exact same amount 7650 so just to be clear if you wanted to hire an employee and pay them a hundred thousand dollars in gross salary you actually would have to set aside a hundred thousand dollars and the seven thousand six hundred and fifty so the employer the total that the employer is paying so 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 total employer if you include the salary is going to be one hundred thousand one hundred seven thousand six hundred and fifty dollars 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 this is I shouldn't even call it the net this is the employees getting after paying FICA taxes is going to be the hundred thousand minus the six seven thousand six hundred fifty but I won't even write that number down I mean what is that that's ninety that's ninety ninety two thousand three hundred and fifty dollars because that's before paying just the traditional federal income tax and the traditional state income taxes so that's going to cut it down a good bit so the employee is going to take home probably on the order of sixty to seventy thousand dollars so above and beyond this thing right here so even though the employer is paying this much the employees getting a lot less in terms of in terms of what they get to take home now one thing that I think it is worth mentioning is unlike traditional federal income tax and traditional federal income tax you're first the first several tens of thousand dollars you make are not taxed and then 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 and that's because you only pay the FICA tax on the first 106,000 or at least this is the numbers in 2011 you only paid on the first one hundred six thousand and eight hundred dollars so someone who makes two hundred thousand dollars will pay the same FICA tax as someone who paid who makes $106,800 so you only pay on the percentage below that and the reason why is it that the person making the two hundred thousand dollars will make will get the exact same benefits as well as the person who pays 106 a $106,800 and this number essentially they try to index it roughly to inflation so it will go up over time but to some degree someone who someone who makes let's say well someone who makes below this threshold is going to pay this percentage is going to between them and their employers they're going to pay this percentage of their income well someone who makes much more than this will actually pay a smaller percentage of their income but they'll end up getting the same benefits and so that's one reason why it's considered regressive is that as you make more money you're actually paying a smaller percentage of your income on FICA tax and the other reason why it's considered regressive is actually on the benefit side because obviously someone who if you have two people receiving Social Security benefits so you have this person so this is when they turn 65 let me put it this way so let's say that you you have two people they work their whole lives or they and they let's say they both retire at 65 although that retirement rage is increasing it it's slowly being indexed up and then they retire it's known that the wealthier people or wealthier and there's also demographics based 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 they're actually able to get their benefits for longer so depends where 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 were paying and they're they're very well likely to be able to collect these payments for longer than someone who maybe doesn't have the quite the same I guess quality of life and and doesn't actually live as long