Despite the fact the every employee in the United States is required to pay taxes, most have absolutely no idea what these taxes are. Perhaps the most confusing of all is FICA tax.
What is FICA Tax?
FICA is actually the acronym for the Federal Insurance Contributions Act. It is the piece of legislation that allows the United States government to collect money, in the form of taxes, from US employees and employers. In theory, the money collected is earmarked for retirement benefits for the elderly, sick, and disabled.
Unlike other forms of taxation, FICA is actually the same for every working American regardless of how much income they earn. Furthermore, this tax is capped; meaning high-income earners are typically not overly burdened by excessive taxation. For the calendar year ending December 31, 2011, the FICA tax limit is $106,800.
FICA Tax Rate
FICA taxes are based on the gross income earned per employee. For each dollar earned, the employee is taxed 4.2% and the employer is taxed 6.2%; for a total of 10.4%. It should be noted that the employee portion was reduced for the 2011 tax year from 6.2%. At the time this article was written, this reduction will be eliminated beginning January 1, 2012.
How Does FICA Tax Impact Self-Employed Individuals?
While it is certainly no fun to be taxed on money that the average citizen may or may not ever see any benefit from, self-employed tax payers are taxed even more aggressively. As noted above, the employee and the employer both contribute funds to pay for government entitlements. If you are self-employed, you must pay not only the employee’s portion but the employer’s portion as well. As a compromise, however, self-employed individuals are allowed to deduct 50% of this tax as a general business expense.
Can an Individual Overpay their FICA Tax?
While it is certainly not a normal occurrence, in some circumstances an individual can actually overpay their FICA tax. This typically occurs when an employee works more than one job during the tax year. As every employer is required to withhold FICA tax, they must do so even if the employee claims that they have already paid in the maximum amount. Individuals that overpay can get a refund of the overpayment when they file the annual 1040 tax returns.
FICA is a relatively straightforward, and easy to understand, tax. It should be noted, however, that if an individual fails to pay in the correct percentage during the year, they will be required to pay it by April 15th of the following year as part of filing their annual tax returns.
