What is FICA? What does it tax and what does it not?
FICA are your payroll taxes, medicare and social security, they make up 7.65% of your taxes that come out, social security is at 6.2% and only comes out of your check up to making $117,000 while medicare is 1.45% and is always taken out regardless of what you make. They are not refunded when you do your tax return and go to fund parts of the government, your employer will cover the other half of the cost of this, but if you are self employed you have to pay the 7.65 twice, due to having to pay the employee and employer side of it, there is no FICA on long term capital gains and qualified dividends so that is one more benefit of passive income.
Another fine answer, Garrett. Let’s review.
Just as Garrett stated, FICA taxes your earned income to fund social security and medicare at the federal government level. It does not tax passive income (money made outside of your work like dividends, capital gains, royalties, etc. Most folks spend a great deal of time trying to increase their earned income. It would be wise to spend just as much time focused on your passive income. A very simple step would be to increase your savings into retirement and non-retirement accounts as you build up those dividends and capital gains. When you pull them out one day, the FICA tax will not be allowed on the premises!
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