Federal Insurance Contributions Act (FICA) taxes apply only to your earned income, such as your paychecks from working for your employer. FICA taxes do not apply to unearned income, such as stock market investments or interest you earn on your savings account.
Social Security Taxes
The Social Security tax makes up the majority of the FICA tax. As of 2011, the Social Security tax rate is 4.2 percent for employees and 6.2 percent for employers, totaling 10.4 percent. However, the employee rate is scheduled to return to 6.2 percent in 2012 after the one-year reduction in 2011. The Social Security tax is composed of two parts: old-age and survivors insurance and disability insurance. However, this subdivision does not affect the way the tax is collected. For example, in 2011, if your paycheck was for $4,000, you would pay $168 and your employer would pay $248.
The Medicare tax portion, also known as hospital insurance, of FICA is smaller than the Social Security tax. As of 2011, the Medicare rate is 1.45 percent for both the employer and the employee, for a total of 2.9 percent. For example, in 2011, if your paycheck was for $4,000, you would pay $58 in Medicare tax and your employer would pay $58.
The Social Security portion of the FICA taxes may not apply to all your income. Each year, the amount of income to which the Social Security tax applies is adjusted for inflation. Any amount of earned income over the limit remains unaffected by the Social Security tax. For example, in 2011, the Social Security tax only applies to $106,800 of income. If you earn more than this, the extra income will only by subject to the Medicare tax portion of FICA taxes, because there is no limit on the income to which the Medicare tax applies.
Your FICA taxes do not count as income taxes withheld; FICA taxes are calculated separately. When you file your income taxes, you do not get to claim amounts withheld for FICA taxes as taxes you paid during the year. If you had self-employment income for the year, however, you have to pay the self-employment taxes, which equal the FICA taxes for both the employer and the employee. These taxes are added to your income tax liability.