Social Security Disability Insurance Practice Test

The FICA tax, which stands for the Federal Insurance Contributions Act tax, is a payroll tax used to fund Social Security and Medicare. The amount of income on which FICA tax is applied is limited to a specified threshold known as the taxable wage base. This threshold is adjusted annually based on national wage trends and is the maximum amount of earnings that can be subject to the Social Security portion of FICA.

Understanding this concept is essential because it directly impacts both employees and employers in terms of payroll deductions and contributions to the Social Security system. The taxable wage base excludes any income above this limit from being subject to Social Security tax, making it a crucial component of understanding how FICA tax works.

The other terms, while related to Social Security benefits and calculations, do not specifically refer to the limit on income to which FICA tax applies. Average indexed monthly earnings, average monthly wage, and primary insurance amount serve different purposes within the context of Social Security but are not the correct answer regarding the FICA tax limit.