Friday, July 12, 2013

Tax Series #5: Can you tell me more about FICA and self-employment tax? I’m really intrigued…

"FICA" is one of those acronyms that gets tossed around a lot, but not many people could actually explain what it is if you asked them. (So if Jay Leno picks "What is the FICA tax?" for his next question on Jay Walking and interviews you, you will feel super smart.)

Most people's interaction with the FICA tax consists of looking at their pay stub and seeing yet another tax being taken out of their gross pay. So let's take a look at a fancy pay stub I made up in PowerPoint because I love you all so much.

1. Yay, I made money!
2. They took out all these taxes? Federal withholding and state withholding I get, thanks to this post (See "When do you pay your taxes"). But what are the social security and Medicare Tax?
3. Dang. My net pay is not as exciting as my gross pay.

FICA is the stuff in the red box. It stands for the Federal Insurance Contributions Act, and this tax is separate from the income tax that you file your return for on April 15. This tax is specifically responsible for funding Social Security and Medicare. Here are some fun facts:

  • What's the rate? The Social Security portion is a 6.2% tax. (If you're up on your tax current events, you'll recall that for 2011 and 2012 this was dropped down to 4.2%.) The Medicare portion is 1.45% (click here if you don't believe us).
  • Is everything I earn taxed? For 2013, the Social Security portion applies only to the first $113, 700 of your gross wages (so maybe that is everything for you). The Medicare portion, however, has no cap (i.e., no matter how much you earn, all your wages will be subject to the 1.45% tax. 
  • Why do I have to pay everything? What about my boss? Actually, this tax is split between you and your employer 50/50. You just don't see the portion they pay on your pay stub. If you are self-employed, however, you will have to pay both halves yourself, since you are essentially both employer and employee. That makes for a 12.4% Social Security rate and a 2.9% Medicare rate.
We could talk more about this, but we're not going to. You're welcome :) 

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