The acronym FICA is commonly used to refer to Social Security. Technically, FICA stands for the Federal Insurance Contribution Act of 1935, which is the legislation that allows the Internal Revenue Service to collect Social Security taxes. In some situations, FICA can affect your adjusted gross income, or AGI. The impact of FICA on AGI, if any, is different depending on whether you are working or receiving Social Security benefits.
Most workers in the United States have FICA tax taken out of their paychecks. FICA tax is a deduction from your wages but does not affect how much you earn and therefore has no effect on AGI. Normally, you pay 6.2 percent of your gross wages in FICA tax. For 2011 and 2012, Congress lowered the rate to 4.2 percent. Employers pay another 6.2 percent of your wages in FICA tax. Employer contributions are not considered part of your wages and therefore don’t affect your AGI. Medicare tax works exactly the same way, except the rate for employer and employee contributions is 1.45 percent each.
When you earn income from self-employment, you are responsible for paying both the employee and employer FICA contributions because you act as your own employer. The IRS refers to the combined contributions as self-employment tax. You pay income, FICA and Medicare taxes on the amount left over after all business expenses are subtracted from your revenues. Self-employment tax does affect your AGI. The reason is that the IRS allows you to deduct the employer portion from your profit to figure your taxable earnings. This means you subtract 6.2 percent for FICA tax and 1.45 percent for Medicare tax from your profit before calculating your taxes. This reduces your AGI.
When you start receiving Social Security benefits, you normally do not count them as part of your income. This applies if you rely mainly on Social Security benefits for your income. Certain other items such as disbursements from a Roth Individual Retirement Account, also do not count as income. However, if you have too much income such as wages or distributions from traditional IRAs or taxable pension plans, part of your FICA retirement benefits may be added to your AGI.
According to the IRS, you can use a simple calculation to determine if part of your FICA benefits must be added to your AGI and be subject to taxes. First, divide your annual Social Security benefits in half. Add this amount to your gross income. If the total is more than $25,000 for single taxpayers or more than $32,000 for married taxpayers filing a joint return, half of your benefits must be added to your AGI and you must pay taxes on this amount.