What is the FICA Tax?

FICA taxes are like a forced savings program…

Every paycheck, you must pay a percentage of your income to the government to help fund Social Security and Medicare. But when you retire, you can receive Medicare and Social Security payments based on several factors, including the amount of FICA taxes that you paid. So the FICA tax that you pay is like being forced to save money for your retirement.

The Federal Insurance Contributions Act tax is a special tax that goes directly toward funding Social Security and Medicare. Both employees and employers pay FICA taxes, with employers deducting the tax payments directly from employee paychecks.

In 2023, the total FICA tax rate is 15.3% for most people. The employee pays half of the tax, and the employer pays the other half, so the effective tax rate on employee income is 7.65%. Self-employed people pay both halves of FICA tax.

Unlike income taxes or income from tariffs, FICA taxes are earmarked specifically for the programs they support: Social Security and Medicare.

The government uses the income from Federal Insurance Contributions Act taxes for both Social Security and Medicare. In fact, the Social Security benefit that you receive is largely based on the amount of money you make over the course of your career, which directly impacts how much you pay in FICA taxes. In this way, FICA taxes are like forced savings for your own retirement.

Because Social Security does not create an individual savings account for each worker that pays FICA tax, the government uses any money it receives to pay benefits to current recipients of Social Security. Any amount that it does not need to pay out goes into the Social Security Trust Fund, which invests its money in things like U.S. government bonds.

The Social Security programs funded by FICA include Old-Age, Survivors, and Disability programs. The government uses the other portion of FICA taxes to pay for Medicare programs. These programs provide health coverage to seniors and others who are not able to afford health insurance.

In 2023, employers withhold FICA taxes from employee paychecks. The withholding is made based on your gross income from each paycheck and isn’t changed by the information you enter on your W-4 – the form that you use to update your tax withholding based on your estimated tax liability.

Most people won’t have to think about their FICA taxes. Your employer automatically withholds the taxes you owe. But, if you have multiple employers and make more than the Social Security Tax income maximum, your employers may withhold too much money on your behalf.

The self-employed are responsible for paying both the employer’s and employee’s halves of FICA taxes and must make these payments alongside their regular estimated tax payments.

Generally, anyone employed in the United States has to pay FICA taxes. Some select groups are exempt from paying the taxes, including:

• Students employed by the school where they are studying
• Members of recognized religious groups that are opposed to receiving Social Security payments
• International students and educators without permanent residency
• Nonresident employees of foreign governments as well as their families and household staff

You have to pay FICA taxes because they fund important social programs, like Medicare and Social Security. Unlike other government spending, these programs are specifically funded by FICA taxes and do not typically draw money from the pool of normal income taxes.

Without taxpayers who pay FICA taxes, these programs would be unable to pay benefits to other Americans who rely on them. By paying FICA taxes, you help keep these programs running for those who currently benefit and make sure that the programs will be around if and when you need them.

FICA taxes are related to, but not the same as, Social Security.

FICA taxes are money that you pay to the government. Social Security is a group of programs where the government provides financial support to the elderly or disabled. A portion of FICA taxes go toward funding Social Security’s programs, but some FICA taxes also go toward funding Medicare. That means that FICA taxes are responsible for keeping Social Security going, but not all of your FICA taxes go toward Social Security.

FICA taxes are entirely separate from your income tax. If you pay $1,000 in FICA taxes, you cannot count that as money paid toward your annual income tax bill.

While your employer withholds FICA taxes from your paycheck and sends them to the federal government, they cannot be considered federal withholding because they are not part of your income taxes.

Your employer calculates your FICA taxes based on your gross income each paycheck. If you make $1,000 on one paycheck, you’ll likely pay $76.50 in FICA taxes and your employer will make a $76.50 payment of its own (you each typically pay 7.65% as of 2023).

If your next paycheck comes in at $2,000, you and your employer will pay double the FICA tax because your gross income was doubled.

Your employer performs the calculation for each paycheck you receive, so the FICA tax is calculated based on each paycheck’s gross amount.

There are three FICA tax rates that you pay: the Social Security tax, the Medicare tax, and the additional Medicare tax.

The Social Security tax is the largest portion of FICA taxes. The total rate is 12.4% of your total income, with half of the tax paid by the employee and half paid by the employer. This tax applies to the first $147,000 that you make (in 2023, this increases to $160,200). You do not have to pay the Social Security portion of FICA taxes on any amount that you make over $147,000. Accordingly, you won’t receive any additional Social Security benefits based on your income above $147,000 in 2022 (or $160,200 in 2023).

This income maximum means that it is possible to overpay FICA taxes. If you work for two or more different employers, each will withhold taxes based on the assumption that you have no other source of income. This means that if you earn more than $147,000 across two employers in 2022, you will overpay. If this happens, you can file for the excess tax to be refunded as part of your annual tax return. The income maximum for Social Security taxes changes every year based on inflation.

The Medicare portion of FICA tax is 2.9% or 1.45% each for the employee and employer. Unlike the Social Security tax, there is no income maximum for Medicare taxes. You pay the full amount, regardless of your annual income.

One of the most recent changes to FICA taxes (as of 2013) is the addition of a 0.9% tax on wages above $200,000. The employee pays the entire 0.9% of this tax –- There is no employer payment. This additional tax provides more funding to Medicare programs.