You may have heard of the Federal Insurance Contributions Act (FICA), but do you really know what it’s about? This U.S. law is designed to collect payroll taxes and fund programs like Social Security and Medicare. That sounds technical, but don’t worry, I’ll explain it calmly. FICA is basically what allows millions of people to receive benefits like retirement or disability assistance.
How does it work? Employers withhold a percentage of your salary and allocate it to these benefits. If you’re self-employed, it’s a little different: you take on 100% of that tax, but at least you can deduct half of it when filing your taxes.
What it is and how it influences your Social Security contribution
Imagine you work for a company. Every time you get paid, 7.65% of your salary is withheld. If you’re self-employed, that percentage rises to 15.3%, because you also cover the portion that would go to the employer. It may sound tough, but you can deduct half of that amount later.
Where does that money go? Well, to programs like Social Security, which helps over 72 million people with their retirement, and Medicare, which covers medical expenses for another 61 million. Does it sound like a lot? It is. These programs are expensive to maintain: just in 2023, Social Security collected more than $1.35 trillion.
Let’s use a simple example
Let’s assume you earn $2,000 a month. According to current rates, a 15.3% tax would apply, which equals $306. But since it’s a shared responsibility, you’d pay half ($153) and your employer would pay the other half. Out of those $306, $248 would go to Social Security and $58 to Medicare.
If you’re self-employed, you’d have to pay the full $306, though remember you can deduct $153 from your annual taxes.
Limits and details you should keep in mind
FICA has two main components: the Social Security tax (6.2%) and the Medicare tax (1.45%). However, not all your salary is subject to these taxes. For example, in 2024, the income limit for Social Security is $168,600. Any amount you earn above that is not taxed for Social Security.
On the other hand, Medicare has no salary limit, but if you have high income, you pay an additional tax of 0.9%. This applies to:
- Single individuals earning more than $200,000.
- Married couples filing jointly and earning more than $250,000.
- Married couples filing separately and earning more than $125,000 each.
In these cases, the total Medicare rate would be 2.35%.