The Federal Insurance Contributions Act (FICA) Tax is a payroll tax that is paid by both employees and employers in order to fund Social Security and Medicare. The primary principle underlying the act is that individuals who are employed should contribute a portion of their earnings to support Social Security and, later on, Medicare. This ensures that they can access financial and healthcare benefits in their later years based on their contributions.
FICA taxes are calculated by deducting a percentage of an employee's earnings.Â
The purpose of FICA taxes is to provide funding for two primary programs: Social Security and Medicare. Let’s dive deeper into these two mechanisms below.
The Self-Employed Contributions Act (SECA) is a tax law that requires self-employed individuals to pay Social Security and Medicare taxes on their income. While employees have their Social Security and Medicare taxes withheld from their paychecks by their employer, self-employed taxpayers are solely responsible for paying both the employee and employer portions of these taxes. Sole proprietors, for instance, are responsible for paying 12.4% of their income towards Social Security and 2.9% towards Medicare.Â
While self-employed individuals do in fact pay more than wage earned, it is crucial to keep in mind that they get a tax break. Self-employed taxpayers have the opportunity to deduct half of their self-employment tax on their individual income tax return.
In conclusion, understanding FICA and SECA taxes is essential when it comes to filing your taxes properly and efficiently. Although the complexities of these taxes can be challenging, remember that legal assistance is available to you just a click away. Get in touch with a top-tier tax lawyer in your area today with Attorney At Law.