FICA & Medicare Taxes
The Federal Insurance Contributions Act (FICA) includes the Medicare tax and the Social Security tax, and those two tax deductions appear on a payroll check stub as FICA deductions. Some people refer to FICA taxes as payroll taxes and the Medicare tax as the hospital insurance (HI) tax.
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History
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The federal government introduced the Social Security tax in 1937. Medicare taxes were not imposed until 1966.
Features
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FICA taxes are calculated based on gross earned income, such as wages or tips. The Medicare tax is applied to all taxable earned income, but there is a cap on the income taxed for the Social Security portion. For 2010, the Social Security tax applies only to the first $106,800 of earned income.
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Size
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As of 2010, the total Medicare tax rate equals 2.9 percent, and the Social Security tax rate equals 12.4 percent. These rates have not changed since 1990.
Function
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The FICA taxes are split between the employer and the employee. As of 2010, this means the employer pays 7.65 percent and the employee pays 7.65 percent. Your employer deducts your portion the tax from your paycheck.
Benefits
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When you pay the FICA tax, you earn up to four work credits per year toward qualifying for Social Security and Medicare benefits. As of 2010, you earn one work credit for each $1,120 of income subject to FICA taxes. You must have at least 40 credits when you retire to receive benefits.
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