As we approach tax season, many individuals are starting to think about their income and potential tax liabilities. For some, this may include short term capital gains, which are profits made from selling assets that have been held for less than one year. While it is commonly known that short term capital gains are taxed at the same rate as ordinary income, many people are unsure if these gains are also subject to FICA taxes. In this blog post, we will explore the relationship between short term capital gains and FICA taxes and provide some insight on how to approach this situation.
What is FICA?
FICA stands for the Federal Insurance Contributions Act and is a federal payroll tax that is used to fund Social Security and Medicare. These taxes are typically withheld from an individual's paycheck by their employer and are matched by the employer. The current FICA tax rate is 7.65%, with 6.2% going towards Social Security and 1.45% towards Medicare.
Are Short Term Capital Gains Subject to FICA Taxes?
The short answer is no, short term capital gains are not subject to FICA taxes. However, this answer comes with some caveats and it is important to understand the nuances of this situation.
First, it is important to note that FICA taxes are only applied to earned income, which includes wages, salaries, and tips. Since short term capital gains are considered unearned income, they are not subject to FICA taxes. This means that if you have a regular job and also make short term capital gains from selling assets, you will only pay FICA taxes on your earned income.
However, if you are self-employed and make short term capital gains as part of your business, you may be subject to self-employment taxes, which are similar to FICA taxes. These taxes are used to fund Social Security and Medicare for self-employed individuals and are currently set at 15.3%.
How Should You Approach Short Term Capital Gains and FICA Taxes?
It is important to note that while short term capital gains are not subject to FICA taxes, they are still considered taxable income. This means that they will be included in your total income for the year and may push you into a higher tax bracket. As a result, you may end up owing more in federal and state income taxes.
Because of the complexities involved in understanding taxes, it is always a good idea to consult with a tax advisor or accountant. They can help you determine your tax liabilities and provide guidance on how to best manage your short term capital gains. They may also be able to help you find ways to reduce your tax burden, such as through deductions or credits.
Short term capital gains are not subject to FICA taxes, as they are considered unearned income. However, they are still taxable and may impact your overall tax liabilities. It is important to consult with a tax advisor to ensure that you are properly reporting and managing your short term capital gains. With their help, you can navigate the complexities of taxes and minimize your tax burden in the upcoming tax season.