Published on: July 21, 2017
FICA stands for the Federal Insurance Contributions Act. Simply put, it is a tax provision that funds the Social Security Disability program, among other federal programs. It is operated by the IRS, and employees pay into this tax pool in order to facilitate the administration of Social Security disability benefits and other critical federal programs.
FICA taxes play an important role in disability benefits because applicants for SSD are required to have contributed to this pool by paying FICA taxes. This article will dive more deeply into the important role that FICA taxes play in social security disability benefits.
How FICA Works
Both employees and employers have a certain amount deducted from their paychecks, which goes to the payment of FICA taxes. A certain percentage of your wages are taxed in accordance with how much income you earn. Generally, employees are taxed about 6% of their income, and employers are taxed a matching 6%.
Funds collected through FICA are also used to fund the Medicare program that is facilitated by the federal government. Medicare typically goes toward providing assistance to elderly Americans (over 65), as well as low-income earners.
FICA Affects your Eligibility for Disability Benefits
The most important role of FICA is that it affects eligibility for disability benefits. Applicants for disability are generally required to have made contributions to FICA that reach a certain minimum amount. This minimum amount is dependent on age, a number of years you have worked and the amount of wages you have received.
These contributions allow recipients to earn work credits, which can then be converted into disability benefits. In other words, paying into FICA taxes acts as a safety net that you can fall back on in the event that you become disabled (keep in mind that Social Security disability benefits are offered to employees who are unable to engage in any substantial gainful activity due to a disability that they face).
Work credits are the unit of measurement that the SSA uses to determine if you have paid enough into FICA taxes in order to qualify for disability benefits. Typically, your income is converted into work credits by following this formula:
One work credit = $1,300 in income in 2017. You can get a maximum of 4 work credits in a single year (equating to $5,200 in total earned income).
If you earn the minimum of one work credit in a year, you are deemed to have adequately paid into Social Security for that year.
So how many work credits do you need to earn in order to be eligible for disability benefits? The number of work credits you need to earn is dependent on how recently you have worked and for how long you have been working. Simply put, the older you are at the time of applying for benefits, the longer the period you are expected to have been working.
For example, applicants who are 31 years or older are expected to have worked for at least 5 of the previous 10 years (or they are expected to have earned 20 work credits in the past 10 years). Applicants who are between 24 and 31 are expected to have worked for at least 4 years since they turned 21 (or they should have earned 16 work credits since the time they turned 21).
The work credit system can be a bit confusing to understand. So to put it simply, employees who have worked for the required periods of time and have contributed sufficiently into FICA taxes are eligible for benefits in case they become disabled.
Additional Functions of FICA
In addition to funding disability benefits, FICA also funds regular retirement benefits as well as Medicare. In fact, the FICA tax deducts an additional 1.45% from your paycheck and your employer in order to fund Medicare. FICA taxes also go towards funding the healthcare system.
In conclusion, FICA taxes are important contributions made by each worker towards funding disability benefits, retirement benefits, and Medicare. It plays a particularly important role in disability benefits, where it affects your eligibility to receive benefits based on how much you have worked and paid in FICA taxes.