What Is FICA? The Federal Insurance Contributions Act

Have you ever seen "FICA" on your paycheck and wondered what it meant?

If you lived or worked in the United States in 2023, your FICA tax contributed to $1.16 trillion in federal funding - that's 36% of total government revenue!

Funds from the Federal Insurance Contributions Act (FICA) help finance the nation's largest social insurance programs: Social Security and Medicare. Millions of retirees, beneficiaries and people with disabilities rely on these benefits, but workers aren't the only ones who fund them. Employees and employers are responsible for paying FICA taxes.

Let's take a closer look at what FICA is, how it works and how you can navigate this tricky payroll tax with confidence.

What is FICA?

FICA generates money for Social Security and Medicare programs through taxes imposed on nearly every employee and employer in the United States. Signed under the Social Security Act of 1935, FICA was first enacted to provide financial benefits for retired workers aged 65 or older. In 1965, FICA expanded with the passage of the Medicare Act, a law that established a health insurance program for the elderly. Today, FICA provides the funding for both.

How FICA works

FICA is a U.S. federal payroll tax that is automatically deducted from an employee's paycheck. But exactly howmuch is FICA tax?

That depends on if you're an employee or employer. FICA combines Social Security and Medicare taxes for a total rate of 15.3%, but the cost is split between each party.

Specifically, 6.2% of an employee's gross wages go to Social Security tax and 1.45% of their gross wages go to Medicare tax. The employer must match these percentages for a grand total of 15.3%.

Your nine-digit Social Security number tracks how much you pay. Employees earn credits for Social Security benefits as they continue to work and pay FICA taxes.

The Social Security Administration uses the number of credits you've earned to determine your eligibility for Medicare, retirement or disability benefits and your family's eligibility for survivor benefits once you reach retirement age.

Employee and employer FICA contributions

Employers are legally obligated to withhold 6.2% for Social Security taxes and 1.45% for Medicare taxes from an employee's gross wages. Employers must match employee contributions dollar for dollar.

In other words, paying FICA taxes is mandatory. However, it's important to note that this tax only applies to an employee's earned income. This includes:

• salary
• wages
• bonuses
• tips
• commissions
• taxable fringe benefits

Unearned income, sometimes called passive income, is exempt from FICA tax. This includes investment-type income such as taxable interest, ordinary dividends and capital gain distributions.

2024 FICA tax rates

According to the IRS, FICA taxes include old-age, survivors and disability insurance taxes (Social Security) and hospital insurance taxes (Medicare). Different rates apply for each.

Social Security

• The current Social Security tax rate is 6.2% for employees and 6.2% for employers, or 12.4% total.

Medicare

• The current Medicare tax rate is 1.45% for employees and 1.45% for employers, or 2.9% total.
• Employers must withhold an additional 0.9% when an employee's wages exceed $200,000 in a calendar year. There is no employer match for the Additional Medicare tax withholding rate.

Essentially, each party pays 7.65% of their earnings for a total FICA contribution of 15.3%.

What is the maximum FICA taxable income amount?

Social Security limits the amount of income subject to taxation. For 2024's earnings, that limit is $168,600.

This amount is also referred to as the "wage base limit" or the "taxable maximum." It changes every year depending on the national average wage index. However, this limit only applies to employees who pay Social Security taxes. There is no wage base limit for Medicare taxes.

In this instance, any employee who earned $168,600 or more in 2024 would contribute $10,453.20 to Social Security.

Remember, the employer must match employee contributions dollar for dollar, so they would also pay $10,453.20 in Social Security taxes.

How to calculate FICA taxes

To calculate an employee's FICA taxes, multiply their gross pay by the current Social Security and Medicare tax rate. This number will also tell you the employer contribution.

Social Security tax

To calculate the Social Security tax:

• Employee's gross pay x 6.2% = Social Security tax contribution

Medicare tax

To calculate the Medicare tax:

• Employee's gross pay x 1.45% = Medicare tax contribution

Total FICA tax

To calculate the total FICA tax:

• Social Security tax contribution + Medicare tax contribution = total FICA tax

Here's a helpful visual to show how to calculate FICA taxes for an employee whose gross wages were $4,000 for the pay period.

FICA exemptions

Foreign students temporarily present in the United States in F-1, J-1 or M-1 status for less than five calendar years are exempt from FICA tax on wages paid to them for services performed in the United States, according to the IRS.

FICA exempts full-time students for the first five calendar years they live in the United States. If they are not a full-time student, the FICA exemption covers their first two years.

Other tax rates to know

Payroll taxes take many forms, but every employer should understand how current tax rates affect their people and the places they operate.

SUTA tax

The State Unemployment Tax Act (SUTA) - also known as "state unemployment insurance" (SUI) - is a payroll tax required from employers. States place these taxes into their unemployment funds to pay benefits to employees who have separated from their employer.

Failing to pay SUTA can result in:

• fines
• penalty fees
• criminal charges to the employer

SUTA contribution rates vary by state. The state unemployment agency determines the contribution rates for positive-rated employers and negative-rated employers annually. Employers with a positive reserve ratio receive the lowest tax rates, while negative-ratio employers may encounter substantially higher rates.

You can use this comprehensive resource as your guide to verify the SUTA rates of states relevant to your employees and comply with confidence.

FUTA tax

The Federal Unemployment Tax Act (FUTA) generates money for national unemployment programs through taxes imposed on nearly any business with more than one worker.

FUTA taxes fall on employers, not their staff. However, FUTA rates must be derived from employees' wages.

The current FUTA tax rate is 6% of the first $7,000 a business pays to an employee each year. Enterprises and larger employers can expect to pay more FUTA taxes, though their rate per worker won't change.

While the initial $7,000 is known as the "FUTA wage base," SUTA may modify this base. Plus, employers that pay their federal and state unemployment taxes in full may have the opportunity to earn a tax credit worth up to 5.4% of their FUTA taxable wages. This credit may reduce a company's FUTA tax burden to just 0.6%.

SECA tax

The Self-Employment Contributions Act (SECA) tax applies to individuals who are self-employed and do not work for an employer.

SECA requires self-employed people to cover both the employee and employer portion of the FICA tax. This helps ensure the same coverage under social insurance programs, like Medicare and Social Security, once a self-employed person reaches retirement.

Since self-employed taxpayers are defined as both the employee and employer, they are taxed at a rate of 12.4% (6.2% + 6.2%). Their earnings are capped at $168,600 in 2024 - just like FICA. Any gross wages above this amount are not subject to Social Security tax.

The Medicare tax rate is 2.9%, but there is no income cap for Medicare. This brings the total tax rate to 15.3% for self-employed workers.

FICA taxes: FAQ

Do employers have to match FICA rates?

Yes. FICA combines Social Security and Medicare taxes for a total of 15.3%, but the cost is split between the employer and employee.

6.2% of an employee's gross wages go to Social Security tax and 1.45% of their gross wages go to Medicare tax. The employer must match these percentages for a grand total of 15.3%.

Which taxes are included in FICA?

FICA taxes include old-age, survivors and disability insurance taxes (Social Security) and hospital insurance taxes (Medicare).

Is Social Security the same as FICA?

No, they are not the same. FICA generates money for Social Security and Medicare programs through taxes imposed on nearly every employee and employer in the United States.

What is the difference between FICA tax and federal tax?

FICA taxes only apply to earned income, including salaries, wages, bonuses, tips, commissions and taxable fringe benefits. Federal income tax applies to earned and unearned income, which includes taxable interest, ordinary dividends and capital gain distributions.

What are the FICA requirements?

FICA requires employers to withhold 6.2% Social Security tax and 1.45% Medicare tax from an employee's gross wages. Employers must match the FICA taxes paid by their employees for a total FICA contribution of 15.3%.

Explore Paycom's resources to learn more about compliance, employment taxes and more.

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