Most people aren’t alarmed by the payroll deduction labeled as FICA since the acronym is familiar, although not fully understood. The Federal Insurance Contributions Act, or FICA, authorizes the Internal Revenue Service to collect payroll taxes that are actually contributions you make to the Social Security system. You probably are accustomed to seeing FICA tax deduction on your pay stub, but FICA-HI might be unfamiliar.
The IRS requires employers to withhold FICA taxes from employees’ pay and submit the funds to the government. The Social Security Administration keeps track of how much money you pay into the system. When you reach the appropriate age, you receive retirement benefits based on contributions you made to the system. The system provides disability benefits and also pays benefits to your qualifying spouse and children upon your retirement or death.
The HI in FICA-HI stands for “hospital insurance” and refers to a type of trust fund. The U.S. Treasury maintains accounts for the deposit of payroll taxes and funds received from several sources, including FICA and the Self-Employment contributions Act, or SECA. Employees, the self-employed and employers contribute to the HI trust fund. Federal law requires investment of the unused funds and earned interest in interest-bearing federal securities. The HI trust fund is used to pay part of inpatient hospital care, skilled nursing care and other services for eligible disabled and elderly people. Medicare Part A is another name for the Hospital Insurance trust fund.
Medicare Part A
Portions of Social Security taxes pay for Medicare Part A, unlike Medicare Parts B, C and D, which are paid for by premiums and other funds. Individuals over the age of 65 who receive Social Security payments qualify automatically for Medicare Part A and Part B, which is medical insurance. People with disabilities lasting for longer than two years and those with specific illnesses, such as kidney failure, also qualify for Medicare Part A.
Your FICA tax is comprised of contributions to two benefit programs, the Old-Age, Survivors, and Disability Insurance, or OASDI, and the Hospital Insurance known as Medicare A. Employers and employees pay the same FICA contribution rates. Unlike Social Security taxes, there is no upper limit to the Medicare tax. The FICA tax contribution rates are set by federal laws. The rates are based on projections of income and expenses for the benefit programs. The contribution rate for employers and employees is 7.65, which includes 6.2 for OASDI and 1.45 for HI. The rate for self-employed individuals is 15.3, which includes 12.4 for OASDI and 2.9 for HI. The Social Security Administration lists the rates for “1990 and later," which is current as of the time of publication.
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- Social Security Administration: Social Security and Medicare Tax Rates
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