FICA stands for Federal Insurance Contributions Act and consists of a Social Security tax and a Medicare tax. This tax is very important for everyone to understand because so often we only think about federal tax rates and state income tax rates. The FICA tax is a big percentage of your total tax bill, especially for those making under six figures a year.

When I was making big bucks in finance, the tax bill was equally big bucks. The only saving grace was seeing my after-tax paycheck increase after the maximum taxable income threshold for Social Security was breached each year.

The tax amounts were jolting based on how inefficient the government was and still is with regards to spending our money.

Maximum Taxable Income Amount For Social Security Tax

In 2021, employees are required to pay a 6.2% Social Security tax (with their employer matching that payment) on income up to $142,800 (up from $137,700 in 2020). Any earnings above that amount are not subject to FICA tax. The FICA maximum income level tends to increase roughly 2% a year due to inflation.

In other words, if you make $142,800 in 2021, your maximum FICA tax will be $8,853.60. But don’t forget. You also have to pay a Medicare tax rate of 1.45%. Therefore, your total FICA tax rate is 7.65%. 7.65% X $142,800 = $10,924.20. If you are an employer, you have to pay double.

The flip side of this is that as the taxable maximum increases, so does the maximum amount of earnings used by the SSA to calculate retirement benefits.

Maximum Social Security Benefit Amount

The maximum monthly Social Security benefit that an individual can receive per month in 2021 is $3,790 for someone who files at age 70. For someone at full retirement age, the maximum amount is $3,011, and for someone aged 62, the maximum amount is $2,265.

Given we have a progressive tax system in America with Alternative Minimum Tax (AMT) and deduction phaseouts, I’ve calculated that the optimal Adjusted Gross Income is roughly $250,000, +/- $50,000. At $250,000, $112,300 of the earnings is free from the 6.2% FICA tax.

Meanwhile, you still get most of your mortgage interest deduction, and only have to pay a slight amount of AMT, depending on the person. A $250,000 income is also high enough to live relatively comfortably in any part of the world.

Some might argue that the Social Security tax is regressive because it caps out. Why shouldn’t rich people pay more? Here’s the thing people might not understand. Social Security benefits cap out based on the maximum amount of Social Security tax contribution as well.

It’s not like someone who is making $500,000 gets FICA-taxed on all of his earnings and then gets capped on Social Security benefits. He’s just getting the maximum Social Security payout amount when it comes time.

The $500,000 income earner is already paying the highest marginal federal tax rate of 37% plus state taxes, if applicable. 

The end of the year can get hectic. There’s the holidays, family stuff, and work deadlines. But most importantly, there are important year end tax moves to make.

The good thing about having multiple income streams is the financial security it provides. But, the bad thing about having multiple sources of income is a much more complicated tax structure. With 70,000+ pages to the tax code, things can get confusing.

My income sources come from investment income, rental income, W2 income, deferred income, K1s, and 1099 income. My goal is to shield as much income from taxes as legally possible.

I want to keep my Adjusted Gross Income to no greater than $250,000 a year due to AMT and deduction phaseouts that completely go away after this level. It’s also very important to accurately predict your passive income.

Use Business Expenses To Save On Taxes

But as my online business grows, it gets harder to shield income. For example, one can only contribute so much to a 401K and SEP IRA. Meanwhile, I can’t eat $300 business steak dinners every night with clients.

Nor am I willing to buy a luxury car to write off as a business expense. And I don’t want to pay 4X the price for first class flights, let alone fly private. Maximizing ROI and minimizing waste is the way I like to run my business and my personal finances.

The majority of actions to reduce your taxes must take place during the calendar year unless you’re filing as a business entity on a fiscal year. Thus, reviewing your business expenses is one of the important year end tax moves for business owners.

If you want to pay less taxes, it’s worth setting aside some time during the holidays to wrestle this beast to the ground.

John F. Kennedy once said, “Ask not what your country can do for you, ask what you can do for your country.”

I took his message to heart when I came to America as a teenager. As soon as I started my first job out of college, I was proud to pay taxes to help our country thrive.

Starting around age 26, I began paying more than $100,000 in Federal and State income taxes a year. I distinctly remember coming home after a 14-hour day exhausted and finally analyzing my pay stub.

25 percent of my pay went to Federal taxes. 6 percent went to State taxes. 7.65% went to FICA taxes. After contributing to my 401(k), more than half my gross paycheck was gone.

It’s one thing to pay taxes when you’ve got a pleasant job with relatively comfortable hours. It’s another thing to pay lots of taxes when you’re often miserable at work. The desire to be so patriotic like JFK said declines.

Making W2 income is the most inefficient way to earn money. High taxes is why some CEOs gladly accept a $1 salary in exchange for earning stock grants that are taxed at long-term capital gains tax rates.

Let’s look at my three favorite ways to earn money and pay less taxes.

For the past several years I’ve filed a tax extension. A tax extension allows taxpayers to file for a six-month extension if they need more time to prepare their tax returns.

The neat thing is that you can obtain an extension for any reason, so long as you submit Form 4868 electronically or on paper by the April filing deadline.

By filing a tax extension, you’ll also avoid failure-to-file penalties, which can add up to 25% of the tax due. That said, you must still pay your estimated taxes if you owe anything by the April deadline, despite getting an extension.

So why the heck would anybody file an extension? Here are the main reasons.