Any time you earn a paycheck, the amount of cash you actually take home is less than what you earn, because your employer sends a portion of your earnings to the federal government to cover income tax and FICA taxes. FICA is the tax law that allows the government to collect payroll taxes the fund the Social Security and Medicare systems.

Income Subject to FICA

Social Security and Medicare taxes only apply to earned income. Earned income describes cash you gain from performing work, such as wages and salaries earned from a job and profits you make working as an independent contractor or business owner. Cash people make from things other than active work, such as interest on savings accounts, dividends, retirement account withdrawals and capital gains from investments is not subject to FICA taxes. In other words, it is possible to have income without paying FICA as long as all your income comes from things other than a job or self-employment.