What You Need to Know About Personal Back Taxes & Tax Debt

What Is FICA Tax and Do You Have to Pay It?

written by Claudia Grant
reviewed by Mark Badkar
April 1, 2018

Income tax remains a fairly esoteric concept. Our money is taken and given to the government, but where does it go?

In the United States, part of your tax money goes to two social welfare taxes: the Social Security benefit and the Medicare program. These are federal programs that provide financial benefits for the country’s most vulnerable citizens: the disabled, the elderly, and children who have lost a working parent.

Every American taxpayer pays (or helps pay) a 14.3% tax on their income that goes into these programs.

The tax is called the FICA tax, and no matter where you work and what you earn, you will pay it in some form. So what is the FICA tax, and what does FICA pay for? Keep reading to learn how much you’ll pay and where your money goes.

What Is the FICA Tax?

FICA stands for Federal Insurance Contributions Act (FICA), which is the law that created the FICA payroll tax.

According to the FICA definition, it falls within the social security and Medicare tax, which pays for disability insurance, old-age survivors, and hospital insurance.

The FICA tax is characterized by variable rates and multiple taxes, which makes it one of the most confusing of all the payroll taxes.

There are two taxes to be concerned with: social security tax and Medicare tax.

Social Security Tax

At present, the social security tax is 12.4% of which 6.2% is paid by the employer and 6.2% by the employee.

Medicare Tax

There’s also a 1.45% Medicare tax, which is split evenly between employers and employees.

The tax extends further depending on income. Employees paid more than $200,000 annually pay another 0.9% Additional Medicare Tax, which the employer doesn’t match.

Does Everyone Need to Pay FICA Tax?

Almost every employee is subject to the FICA tax. Among other taxes, the IRS has placed a minimum threshold on taxes, such as not assessing a specific tax on anyone who earns below $24,000.

With the FICA tax, the IRS instituted what’s called a taxable wage base. A taxable wage base is the maximum amount of money taxed out of a person’s total income.

Only social security taxes are subjected to a wage base limit.

Evaluate your tax situation

By evaluating your tax situation, you can identify areas where you may be able to reduce your tax burden and make informed decisions about your financial future.

$125,000 $250,000
I don’t know
$125,000 $250,000

In 2018, the wage base limit for social security taxes is $128,400. The limit is updated annually. This means that you only pay social security tax on the first $128,400 that you earn. You won’t be assessed the 12.4% on wages above the limit.

There are no limits on the Medicare tax. You’ll be taxed the 1.45% on all income with an additional 0.9% on wages paid over $200,000.

The bottom line is that everyone might at some point use these social security benefits, so everyone pays the tax so that they might access them.

There are very few exemptions to this rule.

Some religious organizations may avoid the FICA tax with the IRS Form 4029. However, submitting this form also waives their ability to access these benefits.

What Happens If Your Self Employed?

Employees of a company find their FICA withholding is automatically taken out of their paychecks. But the situation becomes more complicated when you have to pay your own taxes because you’re self-employed or run a small business.

The best way to understand the way these taxes work is to consider them as employment and self-employment taxes.

FICA tax is an employment tax or payroll tax. Because self-employed people self-report their income, they pay what is called the self-employment tax or SECA (Self-Employed Contributions Act) tax.

The base rate for the SECA tax is 15.3% on your net earnings, which goes towards the social security and Medicare taxes. Just as there’s a ceiling for employed people, there’s also a wage base limit for self-employed persons: if you exceed the wage base limit, you’re not assessed the social security tax on that income. However, there is still a Medicare tax.

Self-employed workers and small business owners find that the difference isn’t in the overall tax rate but in who’s responsible for it.

Employees and employers split their 14.3% evenly.

If you’re self-employed, you’re responsible for the entire bill.

How Does the IRS Justify Sticking Entrepreneurs With the Whole Bill

The government wants to encourage small business, right? So why do they stick entrepreneurs with a massive tax bill when employees pay only half the tax themselves?

Rather than risk the ire of small business – who make up 97.9% of all companies in the United States – the IRS assesses the tax and then offers a solution.

The IRS justifies the full SECA tax by allowing small businesses to write 50% of the SECA tax off their income taxes. In other words, small businesses and self-employed people write off the portion of the social security tax their employer would normally pay.

Does it work out to be similar savings? The answer to that question depends on your income. If for example, you owe $3,500 in self-employment taxes, you can write $1,250 off your income taxes as an “above-the-line” deduction. Then, you won’t pay tax on that money. Additionally, the income deduction may bring your income down into a more favorable tax bracket.

How to Calculate FICA Tax

What do you owe? To calculate the amount you (or your employee) owes, you’ll need the following information:

  • Gross pay
  • Year-to-date gross pay
  • FICA rates for the current tax year
  • Maximum income contribution for the tax year
  • Retirement deductions

Enter your information in this calculator to see how much you owe.

FICA Tax Supports Everyone

No one avoids paying the FICA tax because, at some point, anyone and everyone might end up using it. By contributing, you’re supporting the most vulnerable people in society and creating a safety net for yourself.

The FICA tax is just a tiny part of tax law, and it’s subject to change. Are you worried about changes in tax law and how it will affect your tax burden?

Visit these resources on personal taxes to learn more.

Claudia Grant

Claudia Grant is a seasoned financial expert with a rich and diverse background. Holding a Master of Science in Taxation, Claudia's 15 years as a CPA and ten years as a financial manager have shaped her into a true industry authority. Departing from the traditional office setting, Claudia now thrives as a tax and financial consultant, catering to a wide array of companies. Her passion for sharing knowledge shines through her insightful articles, where she breaks down complex financial concepts into simple pieces. Claudia's expertise and dedication make her an invaluable resource for businesses seeking adept financial guidance in an ever-evolving landscape.
Read more