All About the FICA Tax

If you earn a wage or a salary, you’re likely subject to Federal Insurance Contributions Act taxes. Not to be confused with the federal income tax, FICA taxes fund the Social Security and Medicare programs. Also known as payroll taxes, FICA taxes are automatically deducted from your paycheck. Your company sends the money, along with its match (an additional 7.65% of your pay), to the government.

Planning your finances goes beyond just taxes. Find a financial advisor who serves your today.

Understanding FICA Taxes

Every payday, a portion of your check is withheld by your employer. That money goes to the government in the form of payroll taxes. There are several different types of payroll taxes, including unemployment taxes, income taxes and FICA taxes. Two types of taxes fall under the category of FICA taxes: Medicare taxes and Social Security taxes.

Paying FICA taxes is mandatory for most employees and employers under the Federal Insurance Contributions Act. The funds are used to pay for both Social Security and Medicare. If you own a business, you’re responsible for paying Social Security and Medicare taxes, too. Self-employed workers are referred to as SECA taxes (or self-employment taxes) based on regulations included in the Self-Employed Contributions Act.

FICA Tax Rates

Both SECA and FICA tax rates have increased since they were introduced. Social Security tax rates remained under 3% for employees and employers until the end of 1959. Medicare tax rates rose from 0.35% in 1966 (when they were first implemented) to 1.35% in 1985.

For the past couple of decades, however, FICA tax rates have remained consistent. Employers and employees split the tax. For both of them, the current Social Security and Medicare tax rates are 6.2% and 1.45%, respectively. So each party – employee and employer – pays 7.65% of their income, for a total FICA contribution of 15.3%. To calculate your FICA tax burden, you can multiply your gross pay by 7.65%.

Self-employed workers get stuck paying the entire FICA tax on their own. For these individuals, there’s a 12.4% Social Security tax, plus a 2.9% Medicare tax. You can pay these levies when you pay estimated taxes every quarter. To figure out how much you owe, you can use the worksheet and instructions provided by the IRS for Form 1040-ES.

Fortunately, if you’re self-employed, you’ll get to deduct half of the tax (7.65%) when you file your tax return. The self-employment tax deduction is an above-the-line deduction that you can use to lower your income tax bill. So you can claim it regardless of whether you’re itemizing your deductions or taking the standard deduction.

FICA Tax: Wage Base Limits

A wage base limit applies to employees who pay Social Security taxes. This means that gross income above a certain threshold is exempt from this tax. The wage limit changes almost every year based on inflation. This income ceiling is also the maximum amount of money that’s considered when calculating the size of Social Security benefits:

• 2025 limit: $176,100
• 2024 limit: $168,600

Medicare taxes, on the other hand, don’t have a wage limit. But there’s an Additional Medicare Tax that high-income individuals must pay. That has been the case since Jan. 1, 2013.

The Additional Medicare Tax rate is 0.90% and it applies to the wages, salaries and tips of certain employees and self-employed workers. So any part of your income that exceeds a certain amount gets taxed for Medicare at a total rate of 2.35% (1.45% + 0.90%).

That income ceiling is $200,000 for single filers, qualifying widows and anyone with the head of household filing status, $250,000 for married couples filing joint tax returns and $125,000 for couples filing separate tax returns. You can calculate how much you owe using Form 8959.

FICA Tax Exemptions

Just about everyone pays FICA taxes, including noncitizens. It doesn’t matter whether you work part-time or full-time. However, there are some exceptions.

For example, college students are exempt from paying FICA taxes on the wages they earn from an on-campus job. Exemptions also apply to some nonresident noncitizens, including foreign government employees and teachers. Certain religious groups (like the Amish) may apply for an exemption from FICA taxes by filing IRS Form 4029. But by not paying these payroll taxes, they waive the right to receive Medicare and Social Security benefits.

Overpaying FICA Taxes

Some employees pay more Social Security taxes than they need to. This could happen if you switch jobs more than once and all of your earnings are taxed, even if your combined income exceeds the Social Security wage base limit. Fortunately, you may be able to get a refund when you file your taxes.

If you have multiple jobs, you can claim the Social Security overpayment on Form 1040. If you owe any taxes, the IRS will use part of your refund to pay them off. Then, you’ll receive whatever is left over. If you overpaid Social Security taxes and you only have one job, you’ll need to ask your employer for a refund. Excess Medicare tax repayments are nonrefundable since there’s no wage base limit.

If you have more than one job, you may underpay the amount of FICA taxes you owe. If that happens, you’ll have to make separate estimated tax payments (unless you asked for additional withholding on your W-4 form).

How To Prepare for Tax Day

Tax Day can be a source of stress for many, but with the right preparation, it doesn’t have to be. Start by gathering all necessary documents, such as W-2s, 1099s, and any receipts for deductible expenses. Organizing these documents early can help you avoid last-minute scrambles and ensure that you don’t miss out on any potential deductions.

Managing FICA taxes effectively requires understanding your obligations and planning accordingly. If you’re self-employed, consider setting aside a portion of your income throughout the year to cover these taxes. This proactive approach can prevent financial strain when tax payments are due. Additionally, staying informed about any changes in FICA tax rates or caps can help you adjust your financial strategy as needed.

To ease the burden of tax payments, take advantage of available tax credits and deductions. Credits like the Earned Income Tax Credit (EITC) can significantly reduce your tax liability if you qualify. Deductions for expenses such as mortgage interest, student loan interest, and medical expenses can also lower your taxable income. By understanding and utilizing these options, you can potentially reduce the amount you owe and increase your refund.

Consulting with a financial advisor can provide personalized guidance tailored to your specific situation.

Bottom Line

Like federal income tax, FICA taxes are mandatory – and in most cases, you can’t get around them. But since they pay for Medicare and Social Security, you will in a sense get the money back, at least indirectly, once you retire. (For this reason, some people would say that FICA taxes aren’t taxes.)

While FICA taxes are automatically taken out of your paycheck as an employee, you’ll need to pay close attention if you change jobs or have more than one. You want to be sure you’re not paying more than you’re required to. Remember, if you’re self-employed, you’ll need to use the IRS worksheets to ensure you’re paying the correct amounts.

Tips for Tax Planning

• If you are looking to make charitable contributions, transfer some of your wealth or leave your estate to your heirs in the most tax-advantageous way, a financial advisor can potentially help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• It’s important to plan for your income taxes so you’ll know what to expect at tax time. SmartAsset’s income tax calculator can help you estimate your tax liability, while our tax return calculator can give you a glimpse of what your refund might look like.

Photo credit: ©iStock.com/GetUpStudio, ©iStock.com/smartstock, ©iStock.com/izusek