Jane Dotson
The Federal Insurance Contributions Act (FICA) is a United States federal payroll tax that funds social security and Medicare programs. FICA was established in 1935 to ensure that working people in the US contribute to social security to access financial benefits later in life. FICA taxes are deducted from workers' paychecks, and employers are required to match their employees' contributions. The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation that provides deposit insurance to depositors in American commercial banks and savings banks. The FDIC was created in 1933 to restore trust in the American banking system after the Great Depression, during which many banks failed and bank runs were common.
| Characteristics | Values |
|---|---|
| What is it? | Federal Insurance Contributions Act (FICA) |
| Type | Payroll tax |
| Who does it apply to? | Both employees and employers |
| Purpose | To fund Social Security and Medicare |
| Who does it benefit? | Retirees, people with disabilities, and children of deceased workers |
| Tax rate for Social Security | 6.2% on income up to $176,100 in 2025 |
| Tax rate for Medicare | 1.45% on all income; additional 0.9% on income above $200,000 |
| Total tax rate for Social Security | 12.4% (including employer contribution) |
| Is it mandatory? | Yes, wage earners cannot opt out of paying FICA taxes |
| Is there a wage base limit? | Yes, for Social Security tax only; no wage base limit for Medicare tax |
| Can tax be refunded? | Yes, if overpaid through multiple jobs or job switches in the same year |
| Is there a temporary reduction? | Yes, President Donald Trump signed an executive order to temporarily suspend the tax from Sep to Dec 2020 |
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What You'll Learn
The Federal Deposit Insurance Corporation (FDIC)
The FDIC's role has evolved over time, and it has played a critical role in resolving failed thrifts and banks. In 1989, the Federal Savings and Loan Insurance Corporation (FSLIC) was abolished and replaced by the Resolution Trust Corporation (RTC), which merged with the FDIC in 1995. This merger gave the FDIC the responsibility of resolving failed thrifts. The Office of Thrift Supervision was created to supervise thrifts, while credit unions remained insured by the National Credit Union Administration. The FDIC also has the authority to manage and sell assets from failed banks, and it works closely with the banking industry and regulatory agencies to maintain stability in the financial system.
The FDIC's funding comes from premiums charged to insured depository institutions, earnings on investments in US Treasury securities, and its own operations. The Dodd-Frank Act of 2010 requires the FDIC to maintain the Deposit Insurance Fund (DIF) at a minimum of 1.35% of all insured deposits. In 2020, this amounted to approximately $8.9 trillion in insured deposits, requiring a fund of $120 billion. The FDIC has had to expend its entire insurance fund during two banking crises: the savings and loan crisis and the 2008 financial crisis. On these occasions, it met its insurance obligations by using operating cash or borrowing through the Federal Financing Bank. The FDIC has never used its option to borrow directly from the Treasury, with a credit line of up to $100 billion.
The FDIC's role is essential in maintaining public confidence in the banking system and protecting depositors' funds. FDIC-insured institutions are permitted to display a sign indicating the terms of its insurance, providing assurance to depositors. The FDIC also provides educational resources and conducts outreach programs to promote financial literacy and help consumers make informed decisions about their banking choices. The FDIC's website offers a wealth of information, including details on deposit insurance coverage, tips for choosing a bank, and guidance on various financial topics.
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The Federal Insurance Office (FIO)
The FIO also plays a role in international relations by representing the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors. In addition, the FIO serves as an advisory member of the Financial Stability Oversight Council and assists the Secretary with the administration of the Terrorism Risk Insurance Program. The FIO is also responsible for advising on important national and international insurance matters, such as climate-related financial risks. For example, following the President's May 20, 2021, Executive Order on Climate-Related Financial Risk, the FIO issued a Request for Information (RFI) to solicit public input on its future work relating to the insurance sector and climate-related financial risks.
The FIO works closely with the National Association of Insurance Commissioners and has no regulatory authority, serving purely in an advisory capacity. The FIO was established to monitor the insurance industry and ensure that affordable insurance products are made available to the entire public. During the financial crisis, some of the largest institutions on the brink of collapse were insurance companies, including AIG, which was bailed out by the government.
The FIO's role in monitoring the insurance sector and ensuring access to affordable insurance products for all consumers is essential to preventing future financial crises and protecting consumers from potential losses. By working with the National Association of Insurance Commissioners and serving as an advisory member of the Financial Stability Oversight Council, the FIO contributes to the stability and accessibility of the insurance industry in the United States.
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The Federal Insurance Contributions Act (FICA)
FICA taxes are used to fund Social Security and Medicare, which provide benefits for retirees, people with disabilities, and children of deceased workers. These benefits include old-age, survivors, and disability insurance (OASDI), as well as hospital insurance benefits for the elderly. The amount that one pays in payroll taxes throughout one's working career is associated indirectly with the social security benefits annuity that one receives as a retiree. This means that FICA is not considered a tax by some because its collection is directly tied to benefits that one is entitled to collect later in life. However, the United States Supreme Court ruled in Flemming v. Nestor (1960) that the Social Security system is neither a pension nor an insurance program and that individuals do not have an accrued property right to benefits from the system, regardless of how much they have contributed. As a result, FICA is treated as a tax for all practical purposes and is subject to Congressional authority.
The FICA tax applies to earned income only and is not imposed on unearned income, such as investment income or "unearned income" like interest on savings deposits, stock dividends, and capital gains. The Hospital Insurance (HI) portion of FICA, which funds Medicare Part A hospital benefits, applies to all earned income, while the OASDI portion of the tax is imposed on earned income only up to a cap annually set by Congress ($160,200 in 2023). The Social Security component is a flat tax for wage levels under the Social Security Wage Base, and no tax is owed on wages above this limit. The earnings above the wage base limit amount are not taken into account in the Primary Insurance Amount (PIA) to determine benefits payable under the various insurance programs of social security.
There are some exemptions to the FICA tax. For example, compensation for real estate agents and salespeople may be exempt under certain circumstances, such as when compensation is based on sales or other output rather than hours worked, and there is a written contract stating that the individuals will not be treated as employees for federal tax purposes. In addition, religious groups that are conscientiously opposed to accepting benefits under a private insurance plan or system may apply for an exemption from paying FICA tax by filing Form 4029. However, this requires waiving the right to all benefits under the Social Security Act and meeting other criteria.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act contains numerous provisions, spelled out over 848 pages, that were to be implemented over several years. The act targeted financial system sectors believed to have caused the 2007–2008 financial crisis, including lax regulations that led to risky lending practices and a housing sector bubble. The legislation sought to make the U.S. financial system safer for consumers and taxpayers, increasing oversight of specific institutions regarded as a systemic risk.
To promote financial stability and enhance the regulatory system, the Dodd-Frank Act reorganizes the financial regulatory structure. It eliminates the Office of Thrift Supervision, assigns new duties to existing agencies, and creates new agencies like the Consumer Financial Protection Bureau (CFPB). The Federal Insurance Office (FIO), established under the Act, has the authority to monitor the insurance sector, access to affordable non-health insurance products for underserved communities, and represent the U.S. on international insurance matters.
The Dodd-Frank Act also addresses deposit insurance. Since its enactment, the Federal Deposit Insurance Corporation (FDIC) insures deposits in member banks up to $250,000 per ownership category, making the previously temporary increase in the deposit insurance limit permanent. The Act requires the FDIC to fund the Deposit Insurance Fund (DIF) to at least 1.35% of all insured deposits, which was approximately $120 billion in 2020.
Studies have found that the Dodd-Frank Act has improved financial stability and consumer protection. However, there is debate about its economic impact, with critics arguing it failed to adequately regulate the financial industry and negatively impacted economic growth and small banks. In 2018, parts of the law were repealed and rolled back by the Economic Growth, Regulatory Relief, and Consumer Protection Act.
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The Federal Savings and Loan Insurance Corporation (FSLIC)
The FSLIC was created in the aftermath of the Great Depression, serving as a safety net for the savings and loan industry. The government sought to restore confidence in the security of savings and loan accounts, ensuring that if any given institution failed, the depositors' funds would be protected. The FSLIC's role was to step in and prevent a tide of insolvencies in the savings and loan industry. However, this had an adverse effect on its own financial stability.
During the 1980s, the FSLIC experienced significant financial strain due to losses in the savings and loan industry. In 1987, one-third of the 3,147 FSLIC-insured savings and loan institutions experienced $13.4 billion in losses due to diversification into riskier activities, high funding costs, and insufficient management. By 1989, the FSLIC was no longer viable, requiring large amounts of taxpayer money to remain operational. The FSLIC was eventually abolished by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), and its responsibilities were transferred to the Resolution Trust Corporation (RTC).
The final combined total for all direct and indirect losses of FSLIC and RTC resolutions was an estimated $152.9 billion. The FSLIC played a crucial role in restoring confidence in the savings and loan industry, but ultimately, its financial challenges led to its dissolution and the transfer of its responsibilities to the RTC and, later, the Federal Deposit Insurance Corporation (FDIC).
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Frequently asked questions
It is a United States federal payroll tax that funds the Social Security and Medicare programs.
Both employees and employers pay FICA to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.
For 2024, wage earners pay 6.2% on income up to $168,600 toward Social Security, and their employers match this amount, for a total tax rate of 12.4%. Wage earners also pay a Medicare rate of 1.45% on all their income.
Yes, for earnings in 2025, the wage base limit is $176,100. There is no wage base limit for Medicare tax.
