April 21, 2015
What is FICA? How much does an employee pay? How can you eliminate it and still receive money?
What is FICA? How much does an employee pay? How can you eliminate it and still receive money?
FICA stands for the Federal Insurance Contributions Act. It states the percentage of your income that will be deducted each year and put towards Social Security and Medicare programs. Employees will pay out 6.2% for Social Security and 1.45% towards Medicare, unless you are self employed, then you would double those amounts and pay both as the employee and the employer. (If you are self employed, you can deduct the employer’s half of FICA as a business expense.)
You can eliminate your FICA payments by filling out a W-4 for your place of work and checking the box that says forgo federal tax withholdings. You can then take that extra money, invest it and gain returns on it, and then pay your FICA deductions at the end of the year.
You captured most of the information, Elizabeth. Let’s review.
(1) FICA is the money you pay from your gross income on earned income. The W-4 does not affect your FICA contributions. The W-4 does affect your tax withholding as it relates to your future tax bill.
(2) You can eliminate FICA by focusing more of your efforts on earning passive income like capital gains and dividends from those inexpensive no-load index mutual funds. No FICA is taken out of passive income, thereby saving you 7.65% with each dollar.
(3) This question highlights the importance of building passive income and not simply focusing on your earned income. Financial freedom can follow!