The FICA Tax: What It Is and How to Calculate It
Whether you’re employed or self-employed, taxes are always going to be an important part of life. One of the most important tax deductions that you should know about, however, is the FICA tax deduction, which applies to both employers and employees alike. In order to know how much you’ll owe in taxes at the end of the year, you should make sure that you know what it is and how to calculate it.
What is the Federal Insurance Contributions Act?
The Federal Insurance Contributions Act (FICA) is a social insurance program that provides benefits such as Social Security, Medicare, and unemployment. The acronym comes from the section of the U.S. tax code that creates it.
Who pays it?
Any person who pays salary, wages, bonuses, or any other type of payment for services performed in the United States (regardless of where the employer is located) must pay Social Security tax and Medicare tax. Employers are responsible for paying half of the Social Security tax (6.2 percent) on behalf of their employees. Self-employed individuals are responsible for paying both halves of these taxes themselves.
How much do you pay into Social Security?
As of 2018, there is a Social Security tax rate of 6.2% that all employers pay and applies only up to an annual earnings cap at $128,400. Earnings above the cap are not subject to Social Security taxes. With this in mind, the employer pays half the Social Security tax rate or 3.1% while the employee contributes another 6.2%.
But what about self-employed people?
Examples of how much an employee pays into Social Security each year
An employee who is paid hourly will pay 6.2% of their gross pay, whereas an employee who is paid a salaried income will only have 4.2% taken out for Social Security. An employer will match that, meaning someone who earns $50,000 per year will end up paying $6,227.00 in Social Security taxes each year if they are paid on an hourly basis or $4,113.00 if they are paid on a salaried basis.
When do you pay the Medicare tax?
Employers pay the Medicare tax for their employees as part of a tax package known as the Federal Insurance Contributions Act (FICA). The money collected from these taxes pays for benefits given to retirees. If you are self-employed, you pay the Medicare portion of this tax on your own. Regardless of whether you’re an employee or self-employed, you also have to pay half of the Social Security tax.
Does everyone in your company have to contribute?
There are several situations in which only some of the employees of a company need to contribute. Generally, those who earn more than $118,500 a year will be required to pay the full 7.65% contribution rate, while those below that cutoff may only have to pay half of that rate.
Can you change your contribution amount?
You can change your contribution amount for tax purposes up until April 15th of the year after you made the contribution. For example, if you want to make contributions from January 1, 2017 to December 31, 2017, you can do so by making a W-4 election on or before April 15, 2018.
Understanding both taxes as a whole
Understanding both of these taxes, what they are, and how they are calculated is the first step to tax preparation. The first is the Federal Insurance Contributions Act tax, or FICA. This act taxes money from your paycheck in order to provide benefits such as Social Security. The second type of tax that an individual pays when they work is the income tax. Income taxes take a percentage of an individual’s salary, but these taxes often vary depending on the situation.v
