What are FICA taxes?

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In a Nutshell

Whether you’re an employer, employee or you work for yourself, you’re likely subject to Social Security and Medicare taxes, which are collectively referred to as FICA taxes. FICA taxes are intended to provide financial support to retirees, disabled people and children.
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This article was fact-checked by our editors and Troy Grimes, tax product specialist with Credit Karma.

The Federal Insurance Contributions Act, or FICA, requires employers to withhold certain payroll taxes for the benefit of retirees, people with disabilities and children.

FICA taxes include the Social Security tax and the Medicare tax. Employers and employees each pay half the tax withheld. But if your wages exceed a set amount, the tax rates on your income can vary.

And if you’re self-employed, you’re responsible for paying into both Social Security and Medicare. You’ll pay the full amount on your own as self-employment tax.

Let’s take a look at what FICA taxes are and how they work.

What are FICA taxes?

To understand what FICA taxes are and why we have to pay them, let’s look at a bit of American history. The Great Depression, which occurred between 1929 and 1939, left millions of Americans unemployed and living in poverty. The Depression was especially hard on older people who couldn’t work.

The Social Security Act of 1935 aimed to give older Americans a path to financial support in retirement. As part of that effort, the Federal Insurance Contributions Act, a tax provision meant to fund Social Security, called for mandatory payroll withholding for American employees.

Because they’re collected under the authority of the act, Social Security and Medicare taxes are often called “FICA taxes.”

How much are FICA taxes?

The tax rates for FICA taxes include 12.4% for Social Security taxes and 2.9% for Medicare taxes. If you’re an employee, you and your employer split the taxes evenly. In other words, your employer withholds 7.65% of your gross income for the two taxes and then pays the other 7.65% itself.

But if you’re self-employed, you’re liable for the full tax amount. But instead of FICA taxes, this is typically referred to as the self-employment tax.

Because these federal taxes are withheld from an employee’s paycheck, they’re often called payroll taxes. They’re separate from your federal and state income taxes, and state payroll taxes, which may also be withheld from your paycheck.

How can I tell how much tax should be withheld from my paycheck?

You can use the IRS online Tax Withholding Estimator to see if the right amount of tax is being withheld from your paycheck. You’ll need your most recent pay stubs and most recent income tax return to use the estimator.

Who must pay FICA taxes?

Most employees, employers and business owners are required to pay FICA taxes.

If you’re an employee, your employer typically withholds both Social Security and Medicare taxes from your paycheck automatically. Then your employer chips in its half. If your employer doesn’t withhold the taxes on your behalf, you’re not off the hook. You’ll still be responsible for paying the tax yourself, just as you would be if you were self-employed.

But there are some situations when you may not need to pay FICA taxes. Here are a few.

  • You receive wages that were due a deceased person in the calendar year the person died.
  • You’re an emergency worker hired on a temporary basis in response to a specific unforeseen emergency — that includes fire, storm, snow, earthquake, flood and similar emergencies — and don’t intend to become a permanent employee.
  • You’re a student who’s enrolled and regularly attending classes, and you also work for certain educational institutions (some exceptions apply).
  • You’re a nonresident alien involved in education (as a student or teacher), research, medical work as a physician, or other types of temporary work that may also be exempt if certain qualifications are met.

Also, keep in mind that you don’t have to pay FICA taxes on any contributions your employer makes to a qualified retirement plan.

Other things to know about FICA taxes

If you’re a high-income earner or you’re self-employed, there are a couple of other things to understand about how Social Security and Medicare taxes work.

Tax rates for high-wage taxpayers can be different

While FICA taxes aren’t considered progressive taxes, like the federal income tax — meaning higher-income groups don’t pay a progressively larger percentage — there are some differences if you earn a certain amount.

For example, in 2019, you’ll only pay Social Security taxes on your first $132,900 in wages for the year. This is called the Social Security wage base limit, and anything you earn beyond that won’t be subject to the 12.4% Social Security tax rate.

There’s no limit on the amount of wages subject to Medicare tax. Also, if your wages exceed $200,000 for the year, any earnings you receive beyond that are subject to an additional 0.9% Medicare tax.

If you’re self-employed, you may get a deduction

If you’re self-employed, you’re on the hook for the full amount of the FICA tax rates. But when you file your individual tax return, the IRS allows you to deduct the employer-equivalent amount — that’s half of what you owe — when you’re calculating your adjusted gross income.

Employees don’t have this option because they’re already paying only half of what’s due to the IRS.

How FICA taxes affect you

Because FICA taxes are a flat percentage for most taxpayers, there isn’t a lot you can do to influence how much you owe. But it’s important to understand that FICA taxes reduce the amount of your take-home pay.

If you work for an employer, make sure these payroll taxes are being deducted from your paycheck each pay period. But if you’re self-employed, it’s crucial that you calculate and pay self-employment tax on a quarterly basis on your own.

If you don’t pay the full tax amount when it’s due, you could face a big tax bill when you file your return — and possibly interest and penalties.

What’s next

FICA taxes have been around for decades, and they help fund the Social Security benefits and Medicare benefits that are intended to help retirees, disabled people and children.

If you have questions about whether or not you’re exempt from paying FICA taxes, review the rules on the IRS website. If you’re subject to FICA taxes (and most employees are), be sure to keep an eye on your paycheck to ensure your employer is withholding these taxes.

And if you’re in a situation where you need to pay and report Social Security and Medicare taxes on your own, be sure you understand how to use and file Form 1040-ES, which is for estimating quarterly tax payments. This is especially important if you’re paying the self-employment tax for the first time. Otherwise, you may get an unpleasant surprise at tax time.

Troy Grimes is a tax product specialist with Credit Karma. He’s worked in tax, accounting and educational software development for nearly 30 years. He has a bachelor’s degree in business administration with an emphasis in business analysis from Texas A&M University. You can find him on LinkedIn.

About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Credit Karma, you can find his wo… Read more.