What is the FICA tax & how does it work?
October 26, 2023 5 min read
The FICA tax—FICA stands for Federal Insurance Contributions Act—is a federal payroll tax. Money comes out of workers’ paychecks, with the tax funds going to pay for federal Social Security and Medicare programs. To calculate the FICA tax owed by an employee, an employer generally multiplies the worker’s gross income by the Social Security and Medicare tax rates.
Read on to learn more about FICA and the FICA tax.
The FICA tax generates revenue to support federal Social Security and Medicare programs.
The FICA tax consists of a Social Security and Medicare tax, along with a Medicare surtax for people whose earnings exceed a certain level.
Employers withhold FICA taxes from employees’ paychecks, subject to certain wage caps.
In most cases, full-time employees, part-time employees and employers must pay FICA taxes. Self-employed people essentially pay FICA taxes, but they go by a different name.
The basic FICA tax rates are 7.65% for an employee, 7.65% for an employer and 15.3% for a self-employed person.
The FICA tax is a federal payroll tax that provides funds for the Social Security and Medicare programs.
In 2022, the Social Security program paid more than $1.2 trillion in monthly benefits to retired and disabled Americans, along with some of their dependents. Social Security represents around one-fifth of the federal budget.
During the federal government’s 2021 budget year, $900.8 billion in Medicare health insurance benefits went to Americans ages 65 and over, along with some people dealing with various disabilities and illnesses. Medicare makes up about one-tenth of the federal budget.
A federal law passed in 1935 created the FICA tax to pay for the Social Security program. The Medicare component of FICA was added in 1965.
How the FICA tax works
Employers and employees both pay FICA taxes.
An employer withholds 6.2% of an employee’s paycheck for Social Security and 1.45% for Medicare—up to certain income limits—adding up to a total FICA tax of 7.65%. The employer then separately pays the same 7.65% FICA tax. Altogether, the employee and employer contribute a FICA tax of 15.3%. Self-employed Americans pay the full 15.3% FICA tax.
An extra Medicare tax of 0.9% applies only to the wages, compensation and self-employment income that go above a certain dollar amount. This tax took effect in the 2013 tax year as part of the Affordable Care Act. Employers aren’t required to pay the surtax.
Here’s more information on the three taxes and their income limits:
Social Security tax: The employer and employee Social Security tax rate for 2022 and 2023 is 6.2%, for a total tax rate of 12.4%. For 2023, the two 6.2% rates apply to an employee’s earnings up to $160,200, compared with $147,000 the previous year. For self-employed people, the 2022 and 2023 Social Security tax rate is 12.4%. Their income cap was also $147,000 for 2022 and is $160,200 for 2023.
Medicare tax: The Medicare tax rate for 2022 and 2023 is 1.45% per employer and 1.45% per employee—a total of 2.9%. There is no wage limit for the employer’s and employee’s Medicare tax. For self-employed people, the Medicare tax is 2.9% on net earnings.
Medicare surtax: The Medicare surtax of 0.9% applies to an employee’s earnings and a self-employed person’s earnings—but not to an employer. This tax is imposed only on earnings above a certain threshold. For instance, single filers who earn more than $200,000 and married couples filing jointly who earn more than $250,000 must pay the extra Medicare tax. That’s also true of married couples filing separately when each partner earns more than $125,000. However, this tax applies only to the earnings above these thresholds.
How to calculate FICA taxes
If a worker earns less than the Social Security wage limit, they can calculate how much FICA taxes are owed by multiplying gross pay by 7.65%—the combined rate for Social Security and Medicare taxes. If self-employed, the worker would pay a FICA tax of 15.3%—essentially both the employer’s and employee’s share—on earnings.
The FICA tax typically affects taxable compensation—such as salary, wages, commissions, bonuses and tips—as well as taxable benefits and salary reduction amounts for contributions to plans like 401(k) plans.
Here is an example of how the math works:
Let’s say you’re a single filer whose gross pay is $100,000. To come up with the amount that would be withheld from your paycheck for FICA taxes, you’d multiply $100,000 by 7.65%. The result: $7,650. In this case, the Medicare surtax would not kick in because the gross pay falls below the threshold.
FICA tax FAQ
Here are some frequently asked questions about FICA:
Is FICA a self-employment tax?
The Self-Employment Contributions Act (SECA) tax is essentially the FICA tax for self-employed people. This tax is paid on most net earnings from self-employment.
How do FICA taxes work for self-employed individuals?
In 2023, the Social Security portion of the self-employment tax—12.4%—applies to the first $160,000 in net income. Meanwhile, the Medicare portion of the tax—2.9%—doesn’t include a dollar limit on earnings. All told, the SECA tax adds up to 15.3%.
The Medicare surtax—0.09%—is tacked on for single filers who earn more than $200,000 and married couples filing jointly who earn more than $250,000. It also applies to married couples filing separately when each partner earns more than $125,000.
Are FICA taxes paid on unemployment benefits?
FICA taxes aren’t paid on unemployment benefits.
Is everyone required to pay FICA taxes?
In most cases, people working part time and full time in the U.S. must pay FICA taxes, regardless of the citizenship or residency status of an employee, employer or self-employed person. There are a few exceptions, though. They include:
- Students working for a school, college or university where they’re enrolled
- Children under 18 who are employed by a parent
- Wages paid to a worker following their death
- Wages paid to a disabled worker after they’ve qualified for Social Security disability benefits
- Emergency workers hired temporarily during a fire, snowstorm, earthquake or similar emergency
FICA tax in a nutshell
In the majority of cases, full-time employees, part-time employees and self-employed people must pay FICA taxes, with that revenue supporting federal Social Security and Medicare programs. People whose earnings exceed a certain threshold must pay an extra Medicare tax. Employers pay the same percentage of FICA taxes as their employees, but employers aren’t subject to the additional Medicare tax.