The term “FICA” stands for “Federal Insurance Contributions Act.” FICA taxes fund Social Security and Medicare.
The FICA equation for an employee is: 6.2% of gross wages are withheld from pay for Social Security, and 1.45% for Medicare. The 6.2% is assessed on wages up to the Social Security Wage Base cap for that year; for 2013, that cap is $113,700).
For an employee who makes less than $113,700, they’ll pay 7.65% in FICA taxes (6.2 + 1.45). Additionally, the employer puts in a matching contribution of 7.65%. Total contribution = 15.3% (7.65 + 7.65).
For self-employed taxpayers, FICA taxes are called self-employment tax. Self-employment tax is equal to 15.3% (the self-employed person is considered both employer and employee for FICA tax purposes and so pays 7.65% x 2) . Self-employment tax is accounted for on the self-employed person’s tax return.
For more tax terms, click on the Glossary link at the top of the page.
[…] Jason Dinesen, Glossary of Tax Terms: FICA […]
When I was young and received my first paychecks, I wondered who “FICA” was and why he was taking so much of my money. After launching a tax career and learning tax matters in depth for the Enrolled Agent exam (using the course at http://fastforwardacademy.com/enrolled-agent-exam-prep.htm) I now routinely calculate the FICA savings realized from having an S corp instead of a sole proprietorship. Are you finding fewer individuals creating S corporations recently, Jason?
I’m finding fewer people wanting S corps, and also a lot of business owners who are new to self-employment who lack basic business acumen. It’s one thing for folks not to know what FICA or self-employment taxes are. That’s understandable. But what I see is a complete lack of concept as to what it means to own a business.
Example: I occasionally give presentations to entrepreneurs trying to get businesses off the ground. At such presentations, I hear things that make my stomach turn, such as “I don’t understand payroll, so I’ve just been handing my employees a wad of cash now and then because I can’t afford to pay an accountant.” Really? You can hire employees and pay hundreds or more dollars per month to them but you can’t afford to pay a few hundred dollars to an accountant to help you make sure you’re doing things right?
Stories like this are all too common in my recent experience. I find that a lot of newly self-employed people want the freedom of being a business owner while retaining the responsibility level of an employee.
Maybe it’s always been this way and I’m just seeing it more because my business is growing and I’m dealing with more people now.
I guess this is probably fodder for a future blog post!