Money collected from the FICA tax is used to fund Social Security and Medicare. FICA taxes were established by the federal insurance contributions act. According to the federal insurance contributions act, earnings from workers are taxes to fund the coffers for social security and medicare.
If you get a W2, your employer is typically responsible for handling the required withholding of the FICA tax. The employer withholds the FICA money, deposits it, reports it, and pays the required amount to the IRS.
If you’re an independent contractor, you have to handle the FICA taxes. Self-employed people and people who receive W2s pay the same amount, 15.3% of net incoming earnings.
What is FICA Tax?
Here’s where that 15.3% goes. The Social security portion is 12.4%, and the additional medicare tax is 2.9%. As previously stated, self-employed people and people with W2s pay the same amount.
But FICA taxes for employed and self-employed workers are handled differently. For self-employed workers, the 15.3% is taxed upfront, but you can deduct half of that amount if it is deducted from your personal taxable income total. That reduces your taxable income and is called adjustable gross income.
For employees, the employer starts with the employee’s gross income and deducts payroll taxes. After calculating the net earnings from the employee’s gross pay, the 15.3% is split between the employee and the employer, with the employer portion 7.6% and the employee split portion at 7.6%.
Who Pays FICA Tax
FICA taxes are paid by all workers. The FICA taxes are paid based on your total income from all sources.
If you have a job that produces a W2, plus a self-employed job, FICA taxes will first be taken from the W2 income amount. Then, the self-employment income will be taxed until the social security tax max is reached. For single filers, that’s all you need to know. If your filing status is married, the FICA taxes are paid separately by each working person.
What are your FICA taxes and social security max? That amount is adjusted each year and is based on specific income levels. For 2022, the max wage limit income level is $147,000. If you make more than that wage base limit, you won’t pay additional social security taxes.
But, there’s a medicare surtax. You will continue to pay a .9% additional medicare tax on every dollar you earn above that. The additional tax portion is called the medicare surtax.
Understanding FICA Tax
Let’s sum things up before going further. FICA taxes are a separate tax from your federal income tax. FICA taxes are 15.3% for all workers, both those with an employer and those who are self-employed workers.
The social security tax part is 12.4% and the medicare tax is 2.9%. Your employer is required to withhold monies to cover both the social security and medicare taxes, in addition to withholding other payroll taxes. The employer must deposit those social security and medicare monies, and pay them to the IRS.
2022-2023 FICA Limits and Tax Rates
Social security taxes are capped each year according to income. For 2022 that number is $147,000. After $147,000 in earnings, the medicare tax rate changes to .9%. In 2023, the cap will be $160,200. In other words, next year you’ll continue to pay the full social security and medicare taxes until you’ve earned the $160,000 threshold amount for wage base limits. After that, you won’t owe more social security tax but you’ll owe the medicare surtax.
How to Calculate FICA Tax
The FICA tax is levied against 92.35% of your net earned income. If you have an employer, your net income is what’s left after payroll taxes have been withheld. FICA requires employers to withhold and pay the taxes, both the social security and medicare portion of the tax, based on employees’ wages.
If you’re self-employed or have a sole proprietorship, you’ll owe FICA tax on your net earnings. Self-employed individuals will pay FICA taxes (sometimes called self-employment tax) on their income after deductions, or net income. Learn more about how to file self employment taxes here.
Independent contractors who pay taxes quarterly must also pay the FICA tax quarterly. If you’re estimating your quarterly taxes, it’s best to estimate high on the FICA taxes, so you aren’t charged any interest penalties on overdue tax amounts. You’ll be saving money by overpaying the tax.
FICA TAX Example
Let’s use basic numbers to make the math easier. Let’s say that employee earnings are $100,000. That’s net income for either a self employed or employed person.
The FICA tax is levied against 92.35% of the net earned income. That means that the FICA tax would be figured out using an earned income of $92,350. The self employment contributions act requires that you pay social security tax, 12.4% of the $92,350, and pay medicare taxes of 2.9% of the $92,350.
As previously stated, if you have an employer you’ll pay half of the FICA taxes, based on the net earnings from wages paid, and get an employer match for the other half. Independent contractors pay the full fica tax rates, but can then deduct half the amount of the FICA tax paid from their personal net income total, reducing the adjusted gross income.
The Self-Employed Contributions Act (SECA) and Why it Matters
The Self-Employment Contributions Act (SECA) of 1954 is a tax law that requires the owners of small businesses–such as S corporations, partnerships, and sole proprietorships–to pay a tax of 15.3% of their net income from self-employment for social security, medicare and disability insurance taxes. Before SECA became law, self employed people didn’t have to pay into social security and medicare. Both FICA and SECA taxes fund those valuable programs.
The FICA taxes may not matter to you now, especially if you’re of a certain age. In other words, a youngish worker. You may view paying the FICA social security and medicare tax as just one more sapping payroll tax against your pay, like all those other taxes that “come out of your pocket.”
But the FICA taxes are different from certain taxes and payroll taxes. Later in life, the social security and medicare tax you’ve paid may return to your pocket as you collect social security benefits from the social security administration and sign up for medicare programs. When something impacts your personal finance, that’s when paying FICA taxes will make more sense.
Are FICA withholdings mandatory?
Yes. Withholdings for social security and medicare tax collection is mandatory by federal law as part of the federal insurance contributions act FICA. Social security and medicare taxes must be paid along with your federal income taxes. Both the employer (who’s handling the employee paychecks) and the self-employed must pay the FICA tax rates. For the self-employed, the FICA taxes are often called self-employment taxes.
Is Social Security the Same as FICA?
No. FICA taxes include a tax paid to the social security administration and a tax paid to medicare.
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