Self-Employed FICA Tax | Small Business Accounting

Self-Employment and FICA

If you are self-employed, you might still be subject to some of the taxes levied on large and mid-sized businesses. While self-employed sole proprietors do benefit from certain tax incentives, they are still obliged to pay certain business taxes, like the FICA tax, the Federal Insurance Contributions Act tax. This is a tax that both employers and employees pay in order to support retired people, disabled individuals, and the offspring of deceased workers by funding Social Security and Medicare.

The amount you will pay in self-employed FICA tax is just as large as the FICA tax you would pay as an employee; in fact, it will actually be larger. When it comes to FICA, self-employed individuals play two roles. They must withhold the amount of taxes typically withheld from the employee each pay period and contribute the amount that the employer is expected to provide, as well.

All About Self-Employed FICA Tax

The FICA self-employment tax is one of the reasons many sole proprietors who experience early success soon launch their own corporations or LLCs. When you are working for yourself and paying self-employment FICA tax, it can seem as if you are bearing a very heavy tax burden.

FICA for self-employed people breaks down as follows:

Employee's Social Security Tax: In 2014, this amounted to 6.2% of an employee's salary up to the first $117,000 of their net income. In future years, the amount may increase or the cap may be moved so that more income is subject to the tax.
Employer's Social Security Tax: This is an additional 6.2% on the first $117,000, adding up to a total of 12.4% on that amount.
Employee's Medicare Tax: In 2014, this amounted to 1.45% of all net income.
Employer's Medicare Tax: This is equal to the 1.45% figure quoted above, totaling 2.9% for Medicare.

Altogether, 15.3% of a self-employed individual's salary up to the first $117,000 goes to fund Social Security and Medicare under FICA. Some FICA amounts may vary under special circumstances, such as when employees are tipped.

FICA taxes help maintain the programs that make up the social safety net of the United States. That said, the penalties for failing to withhold a sufficient amount of taxes for FICA can be dire. It is important to develop all business budgets and projections with this significant requirement in mind.

Under FICA, self-employed people who start their own corporation or Limited Liability Company may have things easier, as the entity shoulders some of the FICA burden. However, if you are a principal of the business, FICA tax may ultimately come from what would otherwise be a profit distribution.

FICA is just one of the areas where small business owners may make costly accounting mistakes, even when they have the best of intentions. With the help of Ignite Spot's outsourced bookkeeping and financial reporting services, your firm can stay out of debt and increase profitability.

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