FICA Taxes
FICA is a term used to denote both the Social Security and Medicare taxes upon earned income whose combined rate for both the employer and employee is 15.3% in 2004. The tax is upon earned as opposed to passive income such as dividends, interest and other investment income. FICA taxes are reported for employees on IRS form 941 and, for self-employed individuals, upon Schedule SE to form 1040. Form 941 is filed quarterly whereas form Schedule SE is filed annually. For self-employed individuals, the terms "FICA tax" and "self-employment tax" are synonymous.
All earnings attributable to a sole-proprietor, a general partner, and a member of a single-member LLC from the business are treated as "earning income" and, therefore, subject to self-employment tax. For LLCs that have more than one member and limited partners, it gets tricky. Proposed IRS regulations set forth the following rule: LLC members and limited partners shall NOT be subject to self-employment tax for income from their LLC or partnership interest, unless--
- the partner or member has personal liability for the debts of the partnership or LLC;
- the partner or member has the authority to contract on behalf of the partnership or LLC; or
- the partner or member participates in trade or business of the partnership or LLC for more than 500 hours during the taxable year.
The main except to this rule is if the individual performs work for a partnership or LLC (even if less than 500 hours) and it renders professional services in the fields of health, law, engineering, architecture, accounting, actuarial science or consulting.
2004 FICA Limits
Annual Social Security Wage Base: $87,900 (Note: no Social Security taxes are due for earned income above this amount)
Social Security Tax Rate: 12.4% (employer and employee's portion)
Maximum Social Security Tax: $10,899.60
Annual Medical Wage Base: None (Note: the Medicare tax has no upper limit)
Medicare Tax Rate: 2.9% (employer and employee's portion)
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