Advanced Diploma of Financial Planning (ADFP) Practice Test

What is the main purpose of the FICA law?

1. To regulate tax rates

2. To fund Social Security and Medicare through payroll deductions

3. To provide tax exemptions

4. To determine taxpayer eligibility

The correct answer is: To fund Social Security and Medicare through payroll deductions

The main purpose of the FICA (Federal Insurance Contributions Act) law is to fund Social Security and Medicare through payroll deductions. This law was enacted to ensure that individuals contribute to these important social programs, which provide benefits for retirees, disabled individuals, and certain family members of deceased workers. Through payroll taxes collected under FICA, workers contribute a portion of their earnings to these programs, which helps to maintain their sustainability and provide essential benefits to those in need. This approach directly supports the financial structure of Social Security and Medicare by establishing a consistent revenue stream derived from employee wages. By doing so, FICA plays a crucial role in the social safety net, ensuring that individuals have access to retirement and healthcare benefits in their later years or in times of disability. The other options do not accurately reflect the primary function of FICA. While tax rates may be influenced by various laws, regulation of tax rates is not the main objective of FICA. Similarly, providing tax exemptions and determining taxpayer eligibility fall outside the scope of FICA’s intended purpose, which focuses specifically on funding social insurance programs through mandated payroll contributions.