When you earn money from a job or self-employment, a portion of your income goes to fund Social Security and Medicare. These are essential programs that provide benefits to retirees, people with disabilities, and those who qualify for Medicare. The taxes that fund these programs are called FICA and SECA taxes. But what exactly do they mean, and how do they affect you? Let us break it down in simple terms.
What is FICA tax?
FICA stands for Federal Insurance Contributions Act. It is a mandatory tax that employers deduct from employee paychecks to fund Social Security and Medicare.
- Who pays FICA? Both employees and employers contribute. Your employer withholds FICA taxes from your paycheck and also pays an equal amount.
- How much is the FICA tax? In 2024, the FICA tax rate is:
- 6.2% for Social Security (on earnings up to $168,600).
- 1.45% for Medicare (on all earnings).
- Additional 0.9% Medicare tax applies to individuals earning over $200,000 ($250,000 for married couples filing jointly).
If you work for a company, you will see FICA taxes deducted from each paycheck. Your employer matches your contribution, so the total amount paid toward Social Security and Medicare is double what you see withheld.
Read more: Who can apply for federal tax exemption and who is eligible for tax exempt status?
What is SECA tax?
SECA stands for Self-Employed Contributions Act. It is similar to FICA but applies to those who work for themselves. Unlike employees, self-employed individuals must pay both the employee and employer portions of Social Security and Medicare taxes.
- Who pays SECA? Anyone who is self-employed, including freelancers, independent contractors, and small business owners.
- How much is the SECA tax? In 2024, self-employed individuals pay:
- 12.4% for Social Security (on earnings up to $168,600).
- 2.9% for Medicare (on all earnings).
- Additional 0.9% Medicare tax on earnings above $200,000 ($250,000 for married couples filing jointly).
Since self-employed individuals pay the full amount, SECA taxes can seem high. However, the IRS allows you to deduct half of your self-employment tax as a business expense, which helps reduce taxable income.
How are FICA and SECA taxes different?
Both FICA and SECA taxes fund the same programs, but they differ in how they are paid:
- FICA is for employees, and SECA is for self-employed individuals.
- Employers split FICA taxes with employees, but self-employed individuals pay both portions under SECA.
- Self-employed workers can deduct half of their SECA tax as a business expense.
Read more: What income is free from federal taxes?
Do you have to pay FICA or SECA if you have both a job and a side business?
Yes. If you work for an employer and also have self-employment income, you will pay FICA on your job earnings and SECA on your self-employed income. However, the Social Security tax applies only to the first $168,600 of total earnings in 2024. If your wages already reach this limit, you will not owe Social Security tax on your self-employment income, but you will still owe Medicare tax.
