What type of income is subject to Federal Insurance Contributions Act (FICA) tax?

What type of income is subject to Federal Insurance Contributions Act (FICA) tax?

• A. Interest and dividends
• B. Wages, salaries, and self-employment income
• C. Rental income
• D. Capital gains from asset sales

Answer: (B)

Federal Insurance Contributions Act (FICA) tax applies specifically to compensation for work performed, which includes wages, salaries, and self-employment income. FICA is primarily used to fund Social Security and Medicare programs, and the law mandates that certain types of earned income are subject to these taxes. Wages and salaries are straightforward; they are the compensation that employees earn through their work. For self-employed individuals, the income generated from their business activities is considered earned income as well and is also subject to FICA taxes. This taxation ensures that individuals contribute to the federal programs that provide retirement and healthcare benefits. In contrast, other forms of income such as interest, dividends, rental income, and capital gains do not qualify as earned income for FICA purposes, and thus are not subject to this specific tax. Understanding the distinction between earned income and unearned income is crucial for effective tax planning and compliance.

Federal Insurance Contributions Act (FICA) tax applies specifically to compensation for work performed, which includes wages, salaries, and self-employment income. FICA is primarily used to fund Social Security and Medicare programs, and the law mandates that certain types of earned income are subject to these taxes.

Wages and salaries are straightforward; they are the compensation that employees earn through their work. For self-employed individuals, the income generated from their business activities is considered earned income as well and is also subject to FICA taxes. This taxation ensures that individuals contribute to the federal programs that provide retirement and healthcare benefits.

In contrast, other forms of income such as interest, dividends, rental income, and capital gains do not qualify as earned income for FICA purposes, and thus are not subject to this specific tax. Understanding the distinction between earned income and unearned income is crucial for effective tax planning and compliance.