Legal Definitions - Federal Insurance Contributions Act

The Federal Insurance Contributions Act (FICA) is a federal law that requires employers and employees to pay a tax to fund Social Security and Medicare programs. The tax is based on a percentage of an employee's wages, and employers are responsible for withholding and remitting the tax to the government.

For example, if an employee earns $50,000 per year, the employer must withhold a certain percentage of that amount for FICA taxes. The employer must also contribute an additional amount equal to the employee's contribution.

The purpose of FICA is to provide a safety net for retired and disabled workers, as well as their dependents. The funds collected through FICA taxes are used to pay for Social Security retirement benefits, disability benefits, and Medicare health insurance for those who qualify.