Money collected from the FICA tax goes towards funding Social Security and Medicare. These taxes were established by the Federal Insurance Contributions Act (FICA), which mandates that workers’ earnings be taxed to support these programs. If you receive a W2, your employer handles the required FICA withholding, deposits the money, reports it, and pays the appropriate amount to the IRS.
**What is FICA Tax?**
The Federal Insurance Contributions Act (FICA) tax is a U.S. payroll tax that funds Social Security and Medicare, the main social safety nets in the country. The tax rate is 15.3%, divided between Social Security and Medicare. The tax’s handling varies between employees and self-employed individuals.
**Social Security and Medicare Tax Rates:**
– The Social Security tax is 12.4% of an employee’s gross income, up to a yearly limit that adjusts with inflation. For 2024, this limit is $168,600.
– The Medicare tax rate is 2.9% and applies to all earned income without any income limit, making the total FICA tax rate 15.3%.
**FICA Taxes for Employed Workers:**
Employers and employees each pay half of the total FICA tax rate, meaning 7.65% is deducted from the employee’s paycheck, and the employer matches this amount. This calculation is based on the employee’s gross income.
**FICA Taxes for Self-Employed Workers:**
Self-employed individuals must pay the full 15.3% tax rate since they don’t have an employer to share the cost. The tax is applied to 92.35% of net earnings, not gross income. Self-employed individuals can also deduct half of this self-employment tax amount, which reduces their adjusted gross income and overall income tax.
**Additional Medicare Tax:**
An extra Medicare tax of 0.9% applies to individuals earning over $200,000 (or $250,000 for couples filing jointly). This additional tax is solely paid by the employee without an employer’s contribution.
It’s important to note that while the overall FICA tax amount is the same for self-employed individuals and those receiving W2s, the process and calculations differ. For the most accurate information, always check current IRS guidelines or consult with a tax professional.
**Who Pays FICA Tax**
FICA taxes are paid by all workers based on their total income from all sources. If you have both W2 income and self-employment income, FICA taxes are first taken from the W2 income, then from the self-employment income up to the Social Security tax max. For single filers, this is straightforward. If you are married, each working person pays their FICA taxes separately.
The Social Security tax maximum adjusts each year based on specific income levels. For 2024, the maximum wage base limit is $168,600. Earn beyond this limit, and you won’t owe additional Social Security tax, but you will still pay a 0.9% additional Medicare tax on income above this threshold.
**Understanding FICA Tax**
FICA taxes are separate from federal income tax. The combined rate is 15.3%, covering both Social Security (12.4%) and Medicare (2.9%). Employers are required to withhold and pay these taxes to the IRS.
**2022-2023 FICA Limits and Tax Rates**
The Social Security tax is capped annually according to income, which is $168,800 for 2024. After reaching this cap, the Medicare tax rate is 0.9%. You’ll continue to pay full Social Security and Medicare taxes until you’ve earned up to this threshold. Beyond that, you will only owe the Medicare surtax.
**How to Calculate FICA Tax**
For self-employed taxpayers, FICA tax is calculated on 92.35% of net earned income. Employees pay half of the total FICA tax, with the employer covering the other half. For self-employed individuals, the entire tax is levied on net earnings after deducting business expenses.
– **Employees:** Multiply gross income by 6.2% for Social Security (up to the cap) and 1.45% for Medicare. Add these amounts for the total FICA tax.
– **Self-Employed:** Deduct business expenses from gross income to get net earnings, multiply by 92.35%, then apply 12.4% for Social Security (up to the cap) and 2.9% for Medicare. Add these amounts for the total FICA tax.
– **Independent Contractors:** Similar to self-employed, calculate net earnings, apply a 92.35% factor, then apply the combined 15.3% tax rate.
To avoid penalties, it’s better to overestimate rather than underestimate tax liabilities.
**The Self-Employed Contributions Act (SECA)**
SECA, established in 1954, requires owners of small businesses to pay a 15.3% tax on net income from self-employment for Social Security, Medicare, and disability insurance. Before SECA, self-employed individuals didn’t have to contribute to these programs.
**The Bottom Line**
FICA taxes fund Social Security and Medicare, which may seem like just another payroll deduction now but will provide benefits later in life. Paying these taxes ensures eligibility for future Social Security and Medicare benefits.
**FAQ:**
Withholdings for Social Security and Medicare under FICA are mandatory by federal law. Both employees and self-employed individuals must pay these taxes. While Social Security is part of FICA, the latter also includes Medicare tax.
