What Is the Amount of the Self-Employment Tax (SECA) and How Does It Compare to FICA Taxes?
Explore the differences between SECA and FICA taxes, including rates, payment methods, and deductions for self-employed individuals.
Explore the differences between SECA and FICA taxes, including rates, payment methods, and deductions for self-employed individuals.
Understanding the nuances of self-employment tax (SECA) and its comparison to Federal Insurance Contributions Act (FICA) taxes is essential for independent workers managing their financial obligations. These taxes fund Social Security and Medicare, but they affect employees and self-employed individuals differently.
This article examines the differences between SECA and FICA, clarifying what they mean for taxpayers.
The Self-Employment Contributions Act (SECA) tax covers Social Security and Medicare contributions for independent workers. As of 2024, the SECA tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. This rate applies to net earnings from self-employment, calculated by deducting business expenses from gross income. The Social Security portion is capped at an income threshold of $160,200 for 2024, while the Medicare portion applies to all earnings without a limit.
High earners face an additional Medicare tax of 0.9% on income exceeding $200,000 for single filers or $250,000 for married couples filing jointly, as mandated by the Affordable Care Act. SECA taxes are calculated using Schedule SE, filed with the annual tax return, requiring accurate income and expense records for compliance.
The Federal Insurance Contributions Act (FICA) tax funds Social Security and Medicare through payroll deductions. In 2024, the FICA tax rate for employees is 7.65%, split into 6.2% for Social Security and 1.45% for Medicare. Employers match this contribution, resulting in a combined rate of 15.3%. FICA taxes are automatically withheld from paychecks, ensuring consistent contributions.
As with SECA, the Social Security portion of FICA is subject to a $160,200 income cap in 2024. The Medicare portion, however, applies to all earnings. An additional 0.9% Medicare tax applies to wages above $200,000 for single filers or $250,000 for joint filers, but employers do not match this extra amount.
Employees benefit from payroll withholding, where employers deduct FICA taxes from paychecks and remit them to the IRS. This system minimizes the risk of underpayment penalties and simplifies compliance for employees.
Self-employed individuals, however, must calculate and remit taxes themselves, typically using Form 1040-ES to make quarterly payments. This requires careful income forecasting and expense tracking to avoid year-end tax liabilities. Unlike employees, self-employed individuals must maintain detailed records of their earnings and expenses, such as receipts and invoices, to ensure accurate tax filings.
Self-employed individuals can deduct half of their SECA tax when calculating adjusted gross income (AGI). This deduction represents the employer-equivalent portion of the self-employment tax and is claimed on Form 1040, reducing taxable income.
This deduction acknowledges the dual role of self-employed individuals as both employee and employer, ensuring they are not unfairly burdened compared to traditional employees. While it lowers overall income tax liability, it does not affect the calculation of the self-employment tax itself.