If you’ve been employed at any point, you might have noticed the line for “FICA tax” deducted from your paycheck. This is a typical payroll tax every employee pays—but what does it pay for? What, exactly, is the Federal Insurance Contributions Act (FICA)? Here’s your guide.
What Is the Federal Insurance Contributions Act (FICA)?
FICA is a part of the United States Internal Revenue Code that levies a tax on earned income to fund our Social Security and Medicare programs for retirees and people with disabilities.
FICA was passed as part of the 1930s series of legislation known as the New Deal. The Social Security Act of 1935 created the retirement and disability benefits programs we still use today, and FICA was added in 1939 to add the program’s funding to the tax code.
The Social Security Amendments of 1965 established, among other things, the Medicare and Medicaid programs to provide health insurance for low-income, older and disabled Americans. At that time, the FICA tax increased slightly to fund those programs.
The tax imposed through FICA, known as the “FICA tax” or “payroll taxes,” applies to earned income, but it’s separate from the income tax you pay on the same income. It’s paid as part of the payroll process. Half comes out of your paycheck before you receive it, and your employer pays the other half. You’ll see both contributions listed on each pay stub.
How does FICA tax work?
The total paid into the FICA tax for each employee is 15.3% of earned income. That contribution breaks down like this:
- 12.4% goes toward Social Security.
- 2.9% goes toward Medicare.
A regular, or W-2, employee pays 7.65% of their paycheck toward this contribution while an employer pays another 7.65% of the paycheck toward the contribution. A self-employed worker pays the full 15.3% contribution under a separate rule in the tax code called the Self-Employment Contributions Act (SECA).
Taxes paid into Social Security contribute to benefits a worker is eligible to receive in retirement as a Social Security benefit, or in case of a disability, as Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). You only pay the Social Security tax on income up to a limit called the Social Security Wage Base. Congress updates the wage base each year; for tax year 2024, the limit is $168,600.
The Medicare tax applies to all wages without a limit. These taxes pay for our federal health insurance program that provides health insurance coverage for people 65 or older and those with disabilities.
The same wages that are used to calculate your tax liability now will be used to calculate your Social Security benefits when you claim them. You have to have worked at least 10 years to receive Social Security benefits, and the amount is based on your highest-earning 35 years (up to the wage base), with any years of no earnings counting as $0 in the calculation.
How to calculate FICA tax
As a regularly employed worker, your FICA tax will be calculated for you, deducted from your paycheck, and filed with the tax agencies before you receive your paycheck. It’s simple to determine how much of your pay will go toward the tax. Follow these steps:
- Check your income against the current Social Security Wage Base. For 2024, that’s $168,600. The Social Security tax will only apply to your wages up to this amount. The Medicare tax will apply to your full wages.
- Calculate 6.2% of your wages up to the wage base to determine your portion of Social Security tax. Here’s the formula: [wage] x 0.062. So, if you make $100,000 per year, that’s 100,000 x 0.062 = $6,200 per year in Social Security tax. If you make $200,000 per year, use the wage base: 168,600 x 0.062 = $10,453 in Social Security tax.
- Calculate 1.45% of your full wages to determine your portion of Medicare tax. Just like above, that formula is: [wage] x 0.0145. So, if you make $100,000 a year, that’s 100,000 x 0.0145 = $1,450 per year toward Medicare. If you make $200,000, that’s 200,000 x 0.0145 = $2,900 per year.
- Add your taxes together to get your full responsibility. So, a $100,000 per year salary would pay $7,650 per year, while a $200,000 salary would pay $13,353 per year.
- Divide the total by the number of paychecks you receive each year to determine how much you can expect to be deducted from each payment.
Remember, your deductions are only half of the tax that’s being paid on your behalf. Your employer pays the same amount to cover the full tax liability.
If you’re self-employed (or thinking about moving into self-employment), you have to deduct the full amount from your expected take-home pay for SECA taxes. (This is sometimes called the “self-employment tax,” although that’s a bit misleading because it’s the same tax you pay as an employee; you have to act as both employer and employee in this case.)
To calculate your payroll tax amount for self-employed income, multiply your income up to the wage base by 12.4% for Social Security tax and your full income by 2.9% for Medicare tax. If your self-employed income is above a threshold, add another 0.9% liability for Medicare tax. That threshold is between $125,000 and $250,000 depending on your tax filing status.
Do I have to pay FICA tax?
Most workers in the U.S. have to pay FICA taxes on earned income—that’s money you earn from working. The tax doesn’t apply to what the IRS considers “unearned income,” including investment income or support payments, such as child support or alimony.
Self-employed workers who earn at least $400 a year from self-employment, including freelancing or gig work, are required to pay FICA taxes.
Several types of workers could be exempt from FICA tax, including:
- College students with jobs on campus.
- Some state employees in Alaska, California, Colorado, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, or Texas, which provide their own retirement plans.
- Workers performing services as a council member or for fishing rights-related activity for a federally recognized Native American tribe.
- Some nonresidents, depending on the kind of work they do and who they work for.
- Members of some religious groups or organizations that apply for an exemption.
- A child under the age of 18 employed by their parent in a sole proprietorship or partnership.
- Anyone who’s incarcerated or living in an institution and employed by the prison or institution.
Note that any work that exempts you from paying Social Security tax will not be counted toward your earned wages when it comes time to calculate your Social Security benefits when you’re ready to claim them.
The takeaway
FICA establishes a tax to fund our Social Security and Medicare programs in the U.S. Almost all workers pay FICA taxes out of their paychecks, and employers pay an equal contribution on behalf of each employee. Check your pay stubs to see how much you pay into these programs and note the calculation if you plan on transitioning to self-employment anytime soon.
About the contributors
Dana Miranda is a Certified Educator in Personal Finance, creator of the Healthy Rich newsletter and author of "You Don’t Need A Budget: Stop Worrying About Debt, Spend Without Shame, And Manage Money With Ease." She is a regular contributor to Business Insider and Forbes, and a founding member of the Kiplinger Advisor Collective. She lives with her partner in rural Wisconsin.
Cassie is the business and banking editor at Fortune Recommends. She obtained her degree from Northern Kentucky University and is a certified SCRUM master. Prior to joining the team at Fortune Recommends, Cassie was a deputy editor at Forbes Advisor and a Central Operations Project Manager at Fit Small Business.
EDITORIAL DISCLOSURE: The advice, opinions, or rankings contained in this article are solely those of the Fortune Recommends™ editorial team. This content has not been reviewed or endorsed by any of our affiliate partners or other third parties.
