By Michelle Mire

In Sweden, fika is a four-letter word for happiness. In the United States, FICA is an acronym for the Federal Income Protection Act.

The phrase “income protection” sounds friendly enough, and it’s the act that funds Social Security and Medicare. The challenge and subsequent frustration actually lies in the administration of these taxes.

The Classic Employee/Employer Relationship for FICA Taxes

Business and their employees pay into these funds every time payroll is run. When payroll is processed, the employer and employee each contribute an amount equal toward FICA taxes.

As the business (the employer) is the one managing the payroll, the business goes through the process of withholding (deducting) the employee’s amount and contributing the employer’s amount.

  • For Medicare, the employer contributes 1.45% of their gross wages and the employer contributes an equal amount.
    • Employees earning more than $200,000 pay an additional 0.9%. (Employers are not responsible for any additional amounts for these employees.)
  • For Social Security, the employee and employer both contribute 6.2% of the employee’s gross wages up to a maximum of $127,200 (for 2017) and $128,700 (for 2018).

The math is pretty straightforward. Again, the burden lies in the administration. FICA taxes are part of a group of taxes called payroll taxes (employment taxes) that include:

  • Federal, state and local income taxes.
  • Federal and state unemployment taxes (FUTA and SUTA).
  • Most states also require worker’s compensation coverage and a handful require disability insurance.

The employee and employer amounts must be reported in the following ways:

  • W2s with these amounts must be provided to employees.
  • W3s with the same information must be provided to the Social Security Administration.
  • Employers must follow a regular schedule for the payment and reporting all of the payroll taxes.

As part of this reporting process, the employer has to ensure that they use the correct identification numbers. Accurate employee information is also a must.

FICA Taxes for Self-Employed Individuals

Instead of being called FICA taxes, when applied to someone who’s self-employed, such as a sole proprietor or independent contractor, Social Security and Medicare taxes are referred to as the self-employment tax (SE tax).

In addition to the self-employment tax, self-employed individuals must also pay income tax. Since the business (the employer) and the employee are one in the same, the tax amounts are calculated using the estimated tax method.

Every self-employed individual should be aware of the following:

  • If your net self-employment income was equal to $400 or more (or if you earned over than $108.28 as a church employee) during the tax year, you are required to pay SE tax.
    • Your net income is your total amount of self-employment income multiplied by 92.35% (0.9235).
  • The SE tax can take as much as 15.3% of your gross income, which is the sum of:
    • 12.4% for Social Security up to a maximum of $127,200 (for 2017) and $128,400 (for 2018).
      • If you also hold a job, any Social Security amounts your employer withholds count toward the limit.
    • 2.9% for Medicare
      • Those earning more than $200,000 as (filing as single) or $250,00 (married filing jointly) pay an additional 0.9% for Medicare.
    • Estimated taxes (the SE tax and personal income tax) are paid on a quarterly basis, with the estimated amounts based on your earnings from the previous tax year.
      • If you’re in your first year of being self-employed, you’ll have to estimate your income and tax liability.
    • Self-employed individuals aren’t required to pay unemployment taxes.

Reporting self-employed income:

  • If you’re an independent contractor, each employer you work with will provide you with a Form 1099 for any income of $600 or more.
  • Estimated quarterly taxes are reported and submitted using Form 1040ES.
  • The total amount of ET you pay will be reported in your Schedule C that you file with your personal income taxes.

How to Avoid a FICA Tax Headache

The first step for any entrepreneur should be to do their homework.

  • Know the tax implications right from the start.
  • Work with an accountant or bookkeeper.
  • Set up proper accounting and bookkeeping processes.
  • Use cloud-based accounting software and apps (time tracking, document scanning, invoicing, payroll, etc.) designed for small business and self-employed individuals.
  • Keep excellent records.

FICA itself is intended to produce social good. Being aware of the laws and complying with your tax obligations is also good for you, your employees and your business.