F.I.C.A. – Pay Now, Collect Later
If you have a job, there’s something you may not know about your employer. They’re helping you pay your taxes. Really. Or at least, in effect, they’re paying half of what you owe in one specific area.
Before you send them a thank you note, however, you should know that they do this because it’s the law.
While this may not ease the sting of seeing a chunk of your take-home pay diverted to yet another government program, count your blessings. Because if you are self-employed, you’ll have to pay the whole thing by yourself.
We’re referring, of course, to what is commonly known as your social security taxes, and officially as F.I.C.A. – from the Federal Insurance Contributions Act tax.
Benefits of your F.I.C.A. Contributions
While you probably understand that your Federal taxes fund your fair share of military spending and the expense accounts of your state’s senators and representatives, it’s easy to forget that your F.I.C.A. taxes bring you an even more direct and personal benefit. Because when you retire, that money comes back to you in the form of a monthly Social Security check, as well as Medicare coverage.
And unlike the benefits that accrue from your income tax, the more F.I.C.A. taxes you pay in, the more you get back. At least, up to a point. The total amount of your retirement benefits depend on the amount of F.I.C.A. contributions made over your working years – both yours and by your employer on your behalf – up to a maximum amount.
Are you a student that is employed by your college? Lucky you. You can avoid F.I.C.A altogether.
The F.I.C.A. Formula
The mechanics of paying F.I.C.A. taxes are simple. If you are employed by someone else, each paycheck will be dinged for 6.2 percent of the gross, plus another 1.45 percent for Medicare. That happens until your annual pay reaches a certain level, after which your contributions cease.
In 2009, that amount was $106,800. Normally the ceiling goes up each year to reflect average household income, but because of the recession there will be no increase for 2010.
No mystery there. Because, unless you are one of those senators, the average household income in 2009 went down.
Employers pay the exact same amount each month as the employee, and on their behalf. This happens behind the scenes, but be clear: the total contribution is what funds your retirement benefits, not just the deduction you see from your paycheck.
Unlike Federal taxes, which are usually eligible as deductions on state tax returns, F.I.C.A. taxes are not deductible for individual tax payers.
However, in the case of someone who works for two or more employers in a given year and the annual total exceeds the limit – each employer must continue to withhold F.I.C.A. until the limit has been reached under their employment – the taxpayer can file for an overpayment refund on their tax return.
F.I.C.A. For The Self-Employed
As if making it on your own wasn’t challenging enough these days, the government still collects the full 15.3 percent F.I.C.A. tax from the self-employed. In other words, the same 6.2 and 1.45 percent employee contribution is still owed, in addition to the matching 6.2 and 1.45 percent for the employer’s portion of the tax.
Because obviously, the self-employed person wears both nametags.
Fortunately, the maximum earnings ceiling still applies. But since many self-employed folks don’t know the exact amount of their earnings until year-end (in the form of net profit), overpayment is commonplace (I setup a “tax fund” online savings account for myself). Once again, the adjustment takes place on the Federal tax form, in this case involving a Schedule C for self-employment income, and a Schedule SE for F.I.C.A. calculation for the self-employed, or for any income that was not subject to Federal withholding.
So if you are prone to feel guilty about all that “free” money arriving in your account each month when you retire, relax. You’ve already paid the tab, and every penny you get is one you’ve earned.