What does FICA stand for?

FICA stands for the Federal Insurance Contributions Act, which is a crucial piece of legislation in the United States. The primary purpose of FICA is to fund two key programs: Social Security and Medicare. Under this act, employers and employees both contribute a percentage of wages to these programs through payroll taxes. This contribution structure ensures that individuals who pay into Social Security and Medicare during their working years are eligible for benefits in retirement, disability, or healthcare.

Understanding FICA is important for payroll accounting because it directly impacts how payroll taxes are calculated, withheld, and reported by employers. It also ensures compliance with federal regulations regarding tax liabilities and employee benefits. The other options incorrectly describe FICA or imply an entity that does not exist; therefore, they do not accurately reflect the function or designation of the act itself.