Definition, 2022 Rates and Limits. Rules for Self-Employed

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FICA stands for Federal Insurance Contributions Act. This law requires employers to withhold money directly from employees’ paychecks in order to pay for Medicare and Social Security. FICA taxes are paid by the vast majority of Americans who earn a salary or a wage.

What is FICA?

In 1935, the Federal Insurance Contributions Act was adopted to establish a funding mechanism for Social Security. FICA payroll taxes were not collected by the federal government until 1937. A Medicare payroll tax was created in 1965 to help with Medicare costs. 

FICA taxes are, in essence to “provide a fallback safety blanket to be covered financially as well as medically in old age.” Crystal Stranger, an enrolled agent and author of  “The Small Business Tax Guide.”

These safety net programs are not meant to provide sole income, but workers who have paid into them can get more money and better medical care when they retire or become disabled.

The vast majority of people working in the US — including the self-employed — have to pay  FICA taxes. There are some exceptions, however:

• You won’t have to pay full FICA taxes on more than $160,200 of wages for the 2023 tax year (up from $147,000 in 2022). 
• If your employer qualifies to receive a particular religious exemption, you will not have to pay FICA tax. 
• Non-resident aliens may not have FICA taxes to be paid on their income if they are working in the US. 
• Students who work part-time on campus may not be required to pay FICA taxes, depending on their enrollment status.
  

What are the FICA Tax Rates and Limits? 

You’ll notice that your FICA taxes have been deducted from your gross wage when you look at your paycheck. The majority of employees will see 6.2% taken from their gross wages for Social Security, and 1.45% for Medicare. This totals 7.65%. These amounts are matched by employers for a total 15.3% of the average salary.

For taxpayers with higher incomes, there is a limit to the amount that can be taken for Social Security. Additional levyOnly the employee is responsible for paying the Medicare portion.

Below is a breakdown of FICA tax rates for 2022 and 2023 tax year:

How is FICA tax calculated 

Here’s an example showing how FICA taxes could have been withheld from a worker earning $165,000 in 2022.

Instead of paying FICA tax on $165,000 the employee would only need to pay Social Security taxes up to the wage base limit at $147,000

The employee would be responsible for paying 6.2% Social Security taxes on $147,000 to get a total of $9.114.  For a total of 2,392.50, they would also have to pay 1.45% Medicare taxes on all gross wages. They would also contribute $11,506.50 to FICA taxes.

Remember that your employer would match both tax contributions. If this is included, the employee’s earnings will result in $23,013.00 in FICA tax.

Even though this is the case for a high-earning individual, it’s easy to see how quickly FICA taxes add up. 

How to pay FICA taxes if your self-employed

What happens if your employer isn’t able to pay half of your FICA tax bill? You will still need to contribute to Social Security or Medicare if you’re self-employed. Taxes are assessed on your net earnings, not your gross pay.

The Social Security and Medicare taxes are the same rates — 6.2% and 1.45%, respectively. You’ll have to pay the entire amount if you don’t have a traditional employer. This means that you will be responsible for the 15.3% total tax.

You can deduct half the self-employment tax by making an adjustment to Schedule 1 on Form 1040.

This substantial amount can be quite surprising for many newly self-employed individuals at tax time, as you don’t need to withhold when you are self employed. Both halves of FICA tax are added onto your income tax liability on the federal tax return.

Personal Finance Insider’s calculator makes it easy to calculate your refund and how much debt you owe.

The bottom line

FICA taxes are an expense that must be paid and can cause a serious financial strain on your budget.

Traditional employees may find the tax deductions to be less painful. However, self-employed workers may find themselves in a difficult financial situation when tax season rolls around.