FICA Taxes Explained

TABLE OF CONTENTS

What Are FICA Taxes?
What Is Medicare?
What Is Social Security?
How To Pay FICA Taxes
FICA Tax Rates
FICA Tax Limits
Who Has To Pay FICA Taxes?
Which Payments Are Exempt From FICA Taxes?

Key Takeaways:

  • FICA taxes under the Federal Insurance Contribution Act (FICA) include Social Security and Medicare taxes.
  • Employees and employers share the FICA tax bill, each paying 7.65% of the employee’s gross income to amount to 15.3% total. Of the withheld amounts, 6.2% goes toward Social Security taxes, and 1.45% goes to Medicare taxes.
  • While all income is subject to Medicare tax, only the first $160,200 of earned income is subject to Social Security tax.

What Are FICA Taxes?

The taxes included under the Federal Insurance Contribution Act (FICA) that must be paid by American workers and employers are comprised of Medicare and social security taxes, amounting to 15.3% of your taxpayer earnings.

What Is Medicare?

Medicare is a type of federal health insurance that is offered to individuals in the U.S. either when they reach the age of 65, or in certain cases, to people with qualifying disabilities or medical conditions.

This type of healthcare program only covers hospital visits, nursing home healthcare, hospice, and some home healthcare.

What Is Social Security?

The Social Security program was created to promote economic security in American workers by providing retirement income for people above the age of 65.

How To Pay FICA Taxes

Because FICA taxes are automatically included in the withholding payroll tax set aside by your employer, you do not need to do any additional work, such as filling out an additional tax form or paying a FICA tax liability when filing your federal income tax return. Instead, you will receive a W-2 form from the person in charge of payroll at your company at the beginning of the year, highlighting your earnings and contributions from the previous tax year. Taxpayers who would prefer to put off paying their share of FICA taxes can also choose to do so, but they are responsible for paying back the tax-deferred payments to the IRS.

Self-employed individuals may not be employees, but they are still required to pay their contribution of Social Security and Medicare taxes as a portion of their self-employment tax. Self-employment taxes are regulated by the Self-Employed Contributions Act (SECA).

FICA Tax Rates

The total FICA tax rate is 15.3% of a taxpayer’s gross earnings, but these are divided into Medicare and Social Security taxes. 

Medicare Tax Rate

The tax rate for Medicare tax is 2.9% of an individual’s gross income, but rather than the taxpayer being held responsible for the total 2.9%, this tax is split between employees and their employers, so each pays 1.45%. 

Social Security Tax Rate

The tax rate for Social Security tax is 12.4% of the employee’s gross taxable income, so taxpayers and employees split the cost to each pay 6.2%.

FICA Tax Limits

Additional Medicare Taxes

Taxpayers who earn an annual income above the threshold limit of $200,000 are subject to additional Medicare tax. While the wage or salary earnings below the threshold amount are taxed at the regular Medicare withholding rates of 1.45% or 2.9% total, all earnings above the threshold amount are taxed an additional 0.9%. While the employer does not match this 0.9% rate for additional Medicare tax, they are still responsible for withholding the tax when organizing payroll taxes.

Social Security Wage Base Limits

The maximum wage that is subject to Social Security tax in 2023 is $160,200. All of the money taxpayers earn up to that threshold value will be taxed at the 6.2% Social Security rate, and any earnings above that threshold will not be taxed toward Social Security.

There is no wage base limit for Medicare tax, only for Social Security wages, so no matter what tax bracket you fall into, your earnings will be subject to Medicare taxes.

Who Has To Pay FICA Taxes?

Almost all workers and employers in the U.S. are responsible for paying FICA taxes. Taxpayers are responsible for paying one-half of the FICA tax bill, which is 7.65%, and their employer pays the other half.

Of the 7.65% being withheld from an employee’s paycheck, 6.2% goes toward Social Security taxes, and the other 1.45% goes to Medicare taxes.

Which Payments Are Exempt From FICA Taxes?

There are certain paychecks that are tax exempt from FICA taxes, including:

  • Certain retirement plan contributions
  • Student earnings through working at a school, university, or college
  • Earnings of children under the age of 18 who work for their parents
  • Qualifying church-controlled organization wages
  • Certain local and state government salaries

If you have any questions about FICA taxes or how to optimize your tax savings by claiming any appropriate tax credit or tax deduction, consulting with a tax professional is one of the best approaches to ensure you are abiding by tax law and upholding your taxpayer responsibility.

Schedule a free consultation with Ideal Tax today and enjoy the one-stop source of any information and services you need to feel confident in your finances.