The Federal Insurance Contributions Act imposes both a Social Security tax and a Medicare tax on income you earn from working during the year. When you work as an employee, you split the tax with your employer and your employer simply takes it out of your paycheck. You almost never get to claim this money on your tax return.
FICA Tax and Deductions
The FICA taxes collected by your employer aren't counted against your personal income taxes owed for the year. The only time that you do get to claim some of the FICA taxes paid on your personal tax return is if you worked two or more jobs and your total salary exceeds the Social Security wage base for the year, which is $128,400 as of 2018. In that case, you might have excess Social Security taxes withheld that you can claim. For example, if you earn $128,400 at one job and $50,000 at your second job, both jobs would withhold Social Security taxes on the entire amount because neither employer tells the other how much you make. So, when you file your income taxes, you get to request a refund of the Social Security taxes on $50,000 of your income on your Form 1040.
Though self-employment taxes include the same taxes -- Social Security and Medicare -- as FICA taxes, they're treated differently on your income taxes. See, when you're self-employed, you pay the equivalent of both the employer and the employee portion of the FICA taxes. Because businesses get to write off the employer portion of FICA taxes, the IRS lets self-employed folks write off an equivalent portion of their self-employment taxes. The self-employment tax is 15.3 percent compared to 7.65 percent for employees and 7.65 percent for employers.
The FICA deduction for your self-employment taxes equals half of the amount you owe for the year. Essentially, the part that you pay as your own employer is a deductible business expense. For example, if you owe $8,000 in self-employment taxes, you get a $4,000 tax deduction on your income taxes. Though both self-employment taxes and income taxes are paid in one big bill, they're calculated separately, so the deduction won't help further decrease your self-employment tax bill.
When you file your taxes with self-employment income, you must file Schedule SE to calculate your self-employment tax for the year. Conveniently, Schedule SE also includes a line that calculates your self-employment tax deduction, which is taken as an adjustment to income on line 27 of Form 1040. Since it's an adjustment to income, you can claim it regardless of whether you itemize.
2018 Tax Law and FICA Tax
As of 2018, the maximum amount of income subject to Social Security tax is $128,400, an increase from previous years.
If you are self-employed, you may also be able to take advantage of a new 20 percent tax deduction on what's called passthrough income. That means income from a sole proprietorship, S corporation or partnership that you pay through your own tax return rather than a corporate tax return. That can help offset some of the FICA tax you pay on your earnings.
2017 Tax Law
For 2017, the maximum income subject to Social Security tax is $127,200. The passthrough income deduction isn't available for 2017 and earlier years, even if you file or amend a return in 2018 or later.
- Internal Revenue Service: Topic 554 -- Self-Employment Tax
- Internal Revenue Service: Form 1040 Instructions
- Social Security Administration: Social Security & Medicare Tax Rates
- Social Security Administration: Contribution and Benefit Base
- Internal Revenue Service: Topic 608 - Excess Social Security and RRTA Tax Withheld
- CNBC: Tax Day Comes with an Extra Task for the Self-Employed
- Nolo: The 20% Pass-Through Tax Deduction for Business Owners
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."