FICA is the tax that funds Social Security and Medicare

FICA stands for the Federal Insurance Contributions Act. It is a payroll tax that comes out of your wages every pay period. The money funds two programs: Social Security (retirement, disability, and survivor benefits) and Medicare (health insurance for people 65 and older, and some younger people with disabilities).

When you see "FICA" on your pay stub, it is usually split into two line items: one for Social Security tax and one for Medicare tax. Your employer withholds both from your paycheck and sends them to the federal government. If you are self-employed, you pay both the employee and employer portions yourself, which is called self-employment tax.

FICA is separate from federal income tax, state income tax, and any other deductions on your pay stub. It is a dedicated tax that goes into specific trust funds, not into general government revenue.

Key Takeaways

  • FICA taxes fund Social Security and Medicare, and your employer withholds them from every paycheck.
  • The Social Security portion is 6.2% of your wages (up to an annual cap), and the Medicare portion is 1.45% with no cap.
  • Your employer also pays an equal amount on your behalf, though you do not see this on your pay stub.
  • Self-employed people pay both the employee and employer portions, totaling 15.3% for Social Security and Medicare combined.
  • The amount you pay in FICA taxes during your working years determines how much you receive from Social Security later.

How much FICA tax comes out of your paycheck

The Social Security portion of FICA is 6.2% of your gross wages. However, this rate only applies to wages up to a certain limit each year. In 2024, that limit is $168,600, meaning once you earn that much in a calendar year, no more Social Security tax is withheld from your remaining paychecks. This limit changes each year based on wage growth.

The Medicare portion of FICA is 1.45% of your gross wages, and there is no annual cap. You pay this rate on every dollar you earn, no matter how much you make. Additionally, if your income exceeds certain thresholds ($200,000 for single filers, $250,000 for married filing jointly), you pay an extra 0.9% Medicare tax on the amount above that threshold.

Your employer matches both amounts. So while you see 7.65% withheld from your paycheck (6.2% + 1.45%), your employer sends an additional 7.65% to the government on your behalf. Self-employed workers pay the full 15.3% themselves because they are both employee and employer.

Why FICA taxes exist and where the money goes

FICA was created in 1935 as part of the Social Security Act. The idea was to create a system where workers and employers both contribute to a fund that pays benefits to retirees, disabled workers, and survivors of deceased workers. Medicare was added to FICA in 1965.

The Social Security portion of your FICA taxes goes into the Social Security Trust Fund. When you reach full retirement age (which varies by birth year, ranging from 66 to 67), you can claim retirement benefits based on your earnings record. The amount you receive is calculated from the wages you earned during your 35 highest-earning years.

The Medicare portion goes into the Hospital Insurance Trust Fund (Part A) and the Supplementary Medical Insurance Trust Fund (Parts B and D). These funds pay for hospital stays, doctor visits, prescription drugs, and other medical services for people 65 and older.

How FICA taxes affect your Social Security benefits later

The more you pay in Social Security taxes during your working years, the higher your benefit will be when you claim. Social Security uses your 35 highest-earning years to calculate your Primary Insurance Amount (PIA), which is the base amount you receive each month.

If you have fewer than 35 years of earnings, Social Security counts zero-earning years in the calculation, which lowers your benefit. You need at least 40 credits (roughly 10 years of work) to be covered by Social Security at all. Each year you earn above a certain amount, you earn up to four credits.

Your benefit also depends on when you claim. If you claim at your full retirement age, you receive your full PIA. If you claim earlier (as early as 62), your benefit is reduced permanently. If you delay claiming past your full retirement age, your benefit increases by about 8% per year until age 70.

FICA taxes and self-employed workers

If you are self-employed, you pay FICA taxes through self-employment tax on your net business income. You calculate this on Schedule SE (Form 1040) when you file your taxes. The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.

However, you can deduct half of your self-employment tax as a business expense on your tax return, which reduces your taxable income. You also get credit for the employer-equivalent portion when calculating your Social Security benefits, so you are not penalized for being self-employed.

Self-employed people still face the same Social Security wage cap as employees. In 2024, you only pay the 12.4% Social Security portion on net self-employment income up to $168,600. Income above that is not subject to Social Security tax, though it is still subject to the 2.9% Medicare tax (plus the additional 0.9% if your income is high enough).

FICA taxes versus federal income tax

FICA and federal income tax are two separate withholdings on your paycheck. FICA is a fixed percentage (7.65% for most employees) that goes to Social Security and Medicare. Federal income tax is withheld based on the W-4 form you fill out with your employer, and the amount depends on your filing status, number of dependents, and other factors.

Federal income tax goes into the general Treasury and funds government operations. FICA taxes are earmarked specifically for Social Security and Medicare. You can have federal income tax withheld, but still owe FICA taxes, and vice versa.

Some people are exempt from FICA taxes. Members of certain religious groups that oppose insurance, some government employees hired before 1984, and railroad employees covered by the Railroad Retirement Tax Act do not pay FICA. However, most workers in the United States pay FICA taxes on all wages.

Frequently Asked Questions

Can I opt out of paying FICA taxes?

No, FICA taxes are mandatory for nearly all workers in the United States. The only exceptions are members of certain religious groups that have filed for an exemption, some government employees, and railroad workers. If you work and earn wages, FICA taxes will be withheld from your paycheck.

What happens to FICA taxes if I change jobs?

Your FICA taxes follow you from job to job. Each employer withholds FICA taxes and reports your earnings to Social Security under your Social Security number. All your earnings across all jobs in a year count toward your Social Security record and the annual wage cap. If you earn above the Social Security cap at one job, you will not owe it at another job that same year, but you can request a refund when you file taxes.

Do I get FICA taxes back when I file my taxes?

FICA taxes are not refundable like federal income tax. However, if you worked multiple jobs and paid Social Security tax on wages above the annual cap at more than one job, you can claim a refund for the overpayment when you file your tax return. Medicare taxes are not refundable under any circumstances.

Why do I pay FICA taxes if I might not collect Social Security?

FICA taxes fund not only retirement benefits but also disability benefits and survivor benefits for your family. Even if you never claim retirement benefits, your family members may be covered if you become disabled or pass away. Additionally, Medicare coverage at 65 is available to most people who paid FICA taxes, regardless of whether they claim Social Security.

Does FICA tax explore to all types of income?

FICA taxes explore to wages and self-employment income. They do not explore to investment income, interest, dividends, capital gains, or rental income (unless you are in the business of renting). Certain types of compensation, like some fringe benefits and employer-provided health insurance, are also exempt from FICA taxes.