What small businesses need to know

The money collected from the FICA tax is used to fund Social Security and Medicare. FICA taxes were determined by the federal Social Security Tax Act. According to the Federal Insurance Contributions Act, earnings from employees are taxes to finance social security and medical care funds.

If you receive a W2, your employer is usually responsible for handling the required FICA tax withholding. The employer withholds the FICA money, deposits it, reports it, and pays the required amount to the IRS.

If you are an independent contractor, you must handle FICA taxes. Self-employed and people receiving a W2 pay the same amount, 15.3% of net incoming earnings.

What is FICA tax?

Here’s where that 15.3% goes. The social security share is 12.4% and the additional medical care tax is 2.9%. As mentioned earlier, the self-employed and those with a W2 pay the same amount.

But FICA taxes for salaried and self-employed workers are treated differently. For the self-employed, 15.3% is taxed upfront, but you can deduct half of this if it’s deducted from your total personal taxable income. This 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 earnings, 15.3% is split between the employee and the employer, with the employer’s share at 7.6% and the employee’s share at 7.6%.

fica tax

Who Pays FICA Tax

FICA taxes are paid by all employees. 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 be taken from the W2 income amount first. Self-employment income will then be taxed until the maximum social security tax is reached. For individual filers, this is all you need to know. If you are married filing, FICA taxes are paid separately by each employee.

What are FICA taxes and the Social Security maximum? This amount is adjusted each year and is based on certain income levels. For 2022, the maximum salary cap is $147,000. If you make more than this base salary limit, you won’t pay additional Social Security taxes.

But, there is an additional medical treatment tax. You’ll still pay an additional .9% Medicare tax on every dollar you earn above that. The additional portion of the tax is called the medical care surcharge.

Understanding the FICA tax

Let’s wrap things up before we go any further. FICA taxes are a separate tax from your federal income tax. FICA taxes are 15.3% for all employees, both those with an employer and those who are self-employed.

The social security tax component is 12.4% and the medicare tax is 2.9%. Your employer is required to withhold money to cover both Social Security and Medicare taxes, in addition to withholding other payroll taxes. The employer must deposit this Social Security and Medicare money and pay it to the IRS.

2022-2023 FICA Limits and Tax Rates

Social Security taxes are limited each year by 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 Social Security and Medicare taxes until you hit the $160,000 threshold for wage base limits. After that, you won’t owe more Social Security tax, but you will owe the additional Medicare tax.

How to calculate FICA tax

FICA tax is levied against 92.35% of your net income. If you’re self-employed, your net income is what’s left after payroll taxes are withheld. FICA requires employers to withhold and pay taxes, both Social Security and Medicare, based on employees’ wages.

If you are self-employed or have a sole proprietorship, you will owe FICA tax on your net earnings. Self-employed people 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 FICA tax quarterly. If you calculate your quarterly taxes, it’s best to calculate high FICA taxes so you don’t incur interest penalties on past due tax amounts. You will save money by overpaying the tax.

FICA TAX example

Let’s use prime numbers to make the math easier. Let’s say the workers earnings are $100,000. This is the net income for either self-employment or salaried employment.

FICA tax is imposed on 92.35% of net income. This means that the FICA tax will be calculated using an earned income of $92,350. The Self-Employment Contributions Act requires you to pay Social Security tax, 12.4% of $92,350, and to pay Medicare taxes, 2.9% of $92,350.

As mentioned earlier, if you have an employer, you will pay half of the FICA taxes, based on net earnings from wages paid, and receive an employer match for the other half. Independent contractors pay their full fica tax rates, but can then deduct half the amount of FICA tax paid from their total net personal income, reducing their adjusted gross income.

The Self-Employed Contributions Act (SECA) and why it matters

The Self-Employment Tax Act (SECA) of 1954 is a tax law that requires owners of small businesses—such as S corporations, partnerships, and sole proprietorships—to pay a tax of 15.3% of their net self-employment income for social security, medicare and disability insurance taxes. Before SECA became law, the self-employed did not have to pay for Social Security and Medicare. Both FICA and SECA taxes fund these valuable programs.

The bottom line

FICA taxes may not matter to you now, especially if you are of a certain age. In other words, a young worker. You can look at paying FICA Social Security and Medicare tax as just an additional payroll tax on top of your pay, like all those other “out-of-pocket” taxes.

But FICA taxes are different from certain taxes and payroll taxes. Later in life, the social security and medicare tax you’ve paid can come back into your pocket as you collect social security benefits from the social security administration and enroll in medicare plans. When something affects your personal finances, then it makes more sense to pay FICA taxes.

Are FICA Withholding Required?

Yes. Withholdings to collect Social Security and Medicare taxes are required by federal law as part of the Federal Insurance Contributions FICA Act. Social Security and Medicare taxes must be paid along with your federal income taxes. Both the employer (who handles employee wages) and the self-employed must pay FICA tax rates. For the self-employed, FICA taxes are often called self-employment taxes.

Is Social Security the same as FICA?

No. FICA taxes include tax paid to the Social Security Administration and tax paid to Medicare.

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