The Federal Insurance Contributions Act allows the Internal Revenue Service to collect Social Security tax. Along with Medicare tax, FICA tax is computed and deducted by employers from the paychecks of most workers in the United States. Employers also pay a portion of FICA and Medicare taxes. When you know the FICA formula, it’s easier to understand the deductions from your paycheck. If you are self-employed, you have to know how FICA taxes are calculated because you are responsible to determine the total annual FICA tax to send to the IRS. Here's a look at how to calculate FICA.
Calculate 6.2 percent of your gross pay to compute the FICA tax. If your gross pay totals $750, multiply by .062 for a FICA tax amount of $46.50. The IRS caps the total annual income subject to FICA tax. For example, in 2018, the cap was $128,400. If your year-to-date earnings exceed the cap, no more FICA tax is due. Your employer also pays 6.2 percent of your gross pay in FICA tax that is not deducted from your pay. The FICA tax rate may vary. For instance, Congress temporarily lowered the employee rate to 4.2 percent for 2011 and 2012, but it was restored in 2013.
Compute the Medicare tax by calculating 1.45 percent of your gross pay. If gross pay is $750, the Medicare tax works out to $10.88. As with the FICA tax, your employer pays an equal amount. There is no cap on income subject to Medicare tax.
Figure out your net earnings, if any, from self-employment. Figure net earnings by subtracting business expenses and deductions from your sales. FICA taxes are levied on the first $128,400 of net earnings from self-employment, as of 2018.
Calculate the FICA tax for self-employment by first deducting 7.65 percent from your net earnings. Because there is no employer, you must pay all of the FICA and Medicare taxes. However, you get to deduct the employer-equivalent portion of 7.65 percent before computing the taxes. Suppose you made $10,000 net earnings. Subtract $765, leaving $9,235 subject to FICA and Medicare taxes.
Multiply the net earnings subject to FICA and Medicare taxes from Step 4 by 15.3 percent to figure your combined taxes owed. If you figure the tax on $9,235, take 15.3 percent of that amount for the combined FICA and Medicare tax. The total owed comes to $1,412.96. If your net earnings are more than the IRS annual cap, multiply the amount in excess of the cap by 2.9 percent, which is the self-employment tax rate for Medicare alone.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.