Four kinds of taxes are taken out of most people's paychecks. There are federal taxes, which depend on how many allowances you claim on your W2 form. There are state taxes, unless you arelive in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, none of whom charge state tax. You have Social Security and Medicare taxes, which are known collectively as Federal Insurance Contributions Act (FICA) taxes. There are ways to determine FICA deductions.
Know that Social Security taxes are set at a certain rate depending on the years you earned income. According to the U.S. Code Title 26.3101, any wages earned after 1990 are taxed 6.2 percent for Social Security every pay period. For self-employed individuals, this rate is a much higher at 12.4 percent.
Understand that Medicare is also a set percentage of your check. The standard medicare deduction for wages earned after 1990 is 1.45 percent. Once again, self-employed individuals pay more by having 2.9 percent paid for Medicare.
Add the Social Security total to the medicare total and you come up with your total FICA deduction, which is a 7.65 percent deduction from every paycheck or 15.3 percent for the self-employed.
Realize that wages earned before 1990 were subject to a lower-percentage FICA deduction. From 1937 up to 1989, there was an increasing percentage rate deducted from employee paychecks to pay for FICA taxes (See Resources).
Rest easy knowing that only a certain amount of your income is taxable for FICA. As of April 2010, the maximum amount of FICA-taxable wages was $106,800 (See References).
Self-employed individuals pay a lot more tax than employees because when a person works for someone else, their employer actually pays half their FICA taxes.