What is the FICA tax that is taken out of my paycheck?
FICA is an acronym for "Federal Insurance Contributions Act." FICA tax is the money that is taken out of workers' paychecks to pay older Americans their Social Security retirement and Medicare (Hospital Insurance) benefits. It is a mandatory payroll deduction. Two separate taxes are added together and treated as one amount that is referred to as "payroll taxes" or FICA. These two taxes, individually, pay for both Social Security retirement benefits and Medicare health insurance.
FICA tax deductions also provide benefits to widows and widowers, children who have lost working parents, and disabled workers who qualify for benefits. The amount paid in payroll taxes throughout one's working career is linked to the Social Security benefit that one receives as a retiree or one's family receives if a covered worker dies.
FICA tax is paid by both workers and their employers.
FICA tax is typically 7.65% of earnings up to $113,700 (2013 figure). Employees pay 6.2% of their earnings for Social Security retirement benefits and their employer pays 6.2% for a total of 12.4% of a worker's income. An additional 1.45% tax is also collected to fund Medicare benefits and this, too, is matched by employers.
Self-employed persons pay both halves of both taxes for a total of 15.3% of their net business earnings. These taxes are reported on Schedule SE with their income tax returns.Self-employed persons can deduct the employer-equivalent portion of self-employment tax in figuring their adjusted gross income (AGI).
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