Purpose of FICA & Medicare Taxes
As an employee within the U.S., you are required to pay FICA and Medicare taxes. Your employer will withhold this money and forward it to the federal government as your contributions towards the Social Security and Medicare programs.
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FICA Taxes
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FICA stands for Federal Insurance Contributions Act. Part of the withholding goes towards your future payments from Social Security. The remainder is used for future Medicare payments. The percentage withheld for Social Security since 1980 has been 6.2 percent, but, for 2011 it was reduced to 4.2 percent. Also for 2011, the payment base is $106,800, the maximum amount of wages earned subject to FICA taxes.
Function of FICA Taxes
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FICA taxes you pay now go toward paying current retirees, just as future workers will pay for your benefits when you are eligible to retire. Full retirement age varies depending on your date of birth. As of 2010, if you were born in 1937 or earlier, you can begin to collect full Social Security benefits at age 65. If born in 1960 or later, full retirement age is 67. If born between 1937 and 1960, normal retirement age varies, with a chart available at Social Security's Retirement Benefits by Year of Birth website. You can also retire as early as age 62, but you will receive permanently reduced benefits.
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Medicare Taxes
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Medicare taxes are part of the FICA taxes withheld from your paycheck. Medicare taxes go towards paying the medical expenses of those age 65 or older. As of 2010, 1.45 percent of your wages are withheld for Medicare. For 2011, the payment base is $106,800, the maximum amount of wages earned subject to FICA taxes.
Function of Medicare Taxes
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Medicare is the U.S. government's program to help seniors handle medical expenses. Eligibility starts at age 65 and there are four parts to the coverage. Part A pays hospital expenses for inpatient care, some care in the home, some care for rehabilitation and hospice. Part B helps with doctors' bills. Part C is called Medicare Advantage and is an option for choosing available plans that often cover services not included under Medicare A or B. Part D is for prescription drugs. Part A is automatic and there is no charge. All other parts of Medicare are optional and require a premium.
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References
- Social Security Online: What does FICA mean and why are Social Security taxes called FICA contributions?
- IRS.gov: Social Security Tax / Medicare Tax and Self-Employment
- Social Security Online: Medicare
- Social Security Online: Retirement Benefits by Year of Birth
- Social Security Online: Contribution and Benefit Base
