Much like a 1994 Mariah Carey song, payday is full of the highest highs, with unexpected lows. I have no shame in admitting that the first time I officially got paid, I experienced a roller coaster of emotions. Ever eloquent, my initial reaction to my first pay stub was somewhere along the lines of:
“YAY! MONEY! I’M SUCH A BALLER. Wait. Whaaa-azklasdljkf. Who the hell is FICA??!?!?!?!??!”
Perhaps you had a more articulate response to your first pay stub. Good for you. You are alone.
Seriously? That is a large percentage of my paycheck. My hard work. Who is the FICA character entitled to that chunk of my change? WHY ARE YOU TAKING MY MONEY?!
“OK, so WHO is FICA?”
As it turns out, “FICA” stands for Federal Insurance Contributions Act. It requires that you, along with the vast majority of workers, have mandatory deductions taken out of your paycheck to help pay for Social Security retirement* and Medicare benefits**. Enacted in 1935, FICA taxes pay for a wide range of federal programs that aid the elderly, disabled, widowers, and more.
Very, very crudely stated, they are federal taxes that go toward helping you and other Americans live comfortably when you retire***. But they’re a hair more complex than that.
They are part of what’re called regressive taxes. Unlike income taxes, FICA requires that everyone has to pay the same tax rate — regardless of income level.
Per the 2017 figure, you would typically pay 7.65% of your earnings (up to $127,200) toward FICA taxes. So, when you get a paycheck, you pay the standard 6.2% of your earnings for Social Security retirement benefits, while your employer is required to match that by contributing 6.2% of your earnings. An additional 1.45% tax is also collected to fund Medicare benefits, which is also matched by employers.
(For all the She-man Math Haters Club members like myself, that makes a total of 15.3% of your income when all is said and done.)
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There's also a third component to the FICA tax that's tied into Medicare for the small-ish percentage of the population that earns more than $200,000 in annual income. As part of the Affordable Care Act, a whopping 0.9% Medicare surcharge tax is added to taxpayers who earn more than $200,000 in income (#thanksObama).
“But wait,” you’re thinking, “it almost seems like they want to punish high earners, doesn’t it?”
And, that 0.9% tax remains exclusively on the employee side of the equation. That means your employer owes 1.45% on the entirety of your wages, while you would pay 1.45% up to $200,000, and then 2.35% on any wages above that number.
OK THAT’S ENOUGH MATH. If you’re like me and are still eating ramen noodles and second-guessing that TJ Maxx purchase, you probably don’t qualify for the extra 0.9%.
“So, if I’m self-employed, am I off the hook?”
In the immortal words of Rosa Parks: “No.”
Because taxes are unavoidable. Like death.
Or your mother asking you when she can expect grandchildren.
FICA doesn’t give you a break if you are just striking out on your own with a small wedding planning business. FICA doesn’t slide you a glass of wine and wave off your contribution and say, “Oh, STAHP, it was a GIFT. Consider it a GIFT! This one’s on me.”
Self-employed people pay both halves of both the Social Security and the Medicare taxes for a total of 15.3% of their net business earnings. However, self-employed people can deduct the employer-equivalent portion of self-employment tax in figuring their adjusted gross income (AGI). So that’s good. It’s kind of like a business expense, and you catch a break in that way.
“You are self-employed if you are making money in your own business, as an independent contractor, freelancer, sole proprietor, partner in a partnership, or member of an LLC or an S corporation. If you own a corporation, you are not self-employed.”
The world of self-employment taxes is fairly nuanced, and a little more than what this post covers. You can read more about what the IRS has to say about it here. If that makes your eyes glaze over, read a more digestible breakdown here.
FICA isn’t like your 401(k) — your employer is required by law to withhold these taxes.
Social Security: 6.2% each for you + your employer (only up to $127,200 in wages)
Medicare: 1.45% each for you + your employer (no income limit).
Medicare surcharge tax: 0.9% ONLY for the employee with income >$200,000.
Taxes will most assuredly, 100%, always feel like a punch when you see your pay stub.
Again, this was only a rough summation of FICA taxes so that you have a working definition, but your research shouldn’t stop here. Read up, and let me know your thoughts in the comments below! More importantly, comment the story of receiving your first paycheck and make me feel less like an idiot.
*You know how your mom said your great aunt stopped sending you birthday money because she’s on a “fixed income”? It’s that!
**Not to be confused with Medicaid, the government insurance program offered to low-income people.
***Not to be confused with stool softener, which also helps you and other Americans live comfortably when you retire.