To help you understand what the FICA tax is, let’s take a step back and look at the typical paycheck. First of all, anyone who earns money at a job will see FICA tax taken out of the paycheck. Whether you’re paid by the hour or a salaried employee, or you own your own business, you’re paying half and your employer is paying the other half of what’s owed in FICA taxs to the IRS.
FICA tax is your payment into services you’re probably going to need when you’re retired. It’s social security and Medicare payments. The money taken out of your paycheck for the FICA tax is going towards today’s retirees receiving social security and Medicare.
FICA tax is 15.3% of your income. Well, it’s 12.4% for social security tax and 2.9% into medicare. The social security contribution has a limit of around $106,800 (it changes each year…that’ what it was for 2010). If 12.4% of your income is more than than $106,800, you pay only $106,800.
If you don’t own your own business but rather work for someone else, you will only pay half of these percentages. That means you will be paying 7.65% of your income for the FICA tax. Your employer pays the other half.
If you are a business owner and your salary comes from your own business well that means you’ll be paying both halves of the FICA tax. This is sometimes called the self-employment tax. At least the business can deduct its portion.
The FICA tax is automatically taken out of your paycheck if you work for someone else. If you own your own business or anticipate receiving lots of money from the sale of a home or from investment, you might have to pay your FICA tax quarterly. This is called making estimated tax payments.
Quarterly estimated payments are due four times a year…the 15th of April, June, September and January. Estimated FICA tax payments are hard to calculate so lots of people make use of a tax professional or at least a guidebook or two. There are IRS publications created for this purpose but can be difficult to interpret sometimes. In fact, sometimes you need a tax professional just to interpret the IRS publications.
FICA tax is a result of the Social Security Act of 1935 and provides a financial safety net for retired persons. The Federal trust fund into which all FICA tax payments go also provides disabllity insurance in addition to retirement income and Medicare coverage and benefits for survivors (for example, the widow of someone who was receiving Social Security benefits).
The name of the trust fund is the Social Security Trust Fund and boy oh boy is it in trouble lately. It’s managed by the US Department of Treasury, which invests in government securities to maintain it. Basically, the US Government loans the FICA tax money out to itself and uses the money to finance other wings of the government or projects outside the realm of Social Security. The loans are paid back when bonds come true.
If you make too much money in retirement while receiving social security benefits, the IRS will tax you on 85% of your social security income. So now you’ve come full circle and your’e paying taxes on money you saved via the FICA tax…essentially paying taxes on taxes!
FICA tax rates had been unchanged for years but for 2011 there was a big change. The employee portion of the FICA tax was reduced by 2% and then extended into 2012 as well.
