FICA Tax Explained: What Every Employee Should Know

Payroll is where the rubber meets the road. Money in, money out, and a few line items that look small until you add them up over a year.  

Basically, the FICA tax is the quiet deduction that funds Social Security and Medicare. Also, it shapes the retirement and healthcare scaffolding most workers will eventually lean on.  

If you are employed in the United States, the FICA tax is deducted from every paycheck. Even then, it is widely misunderstood. Therefore, read on to get a better idea of how the FICA tax works. 

What Is FICA Tax?

The Federal Insurance Contributions Act (FICA) requires employees and employers to share payroll contributions. Primarily, they have to fund two programs: 

1. Social Security (for Old-Age, Survivors, and Disability Insurance) 

2. Medicare (for Hospital Insurance) 

The law makes these contributions mandatory. This creates a pay-as-you-go mechanism where today’s workers fund today’s beneficiaries. Later on, those workers become beneficiaries themselves. Essentially, the core structure and rates are set in federal guidance and reviewed annually. 

Importance for Employees and Employers 

Employers must withhold and remit. Meanwhile, employees must see the deduction automatically.  

The purpose goes back to mid-20th-century social insurance design: 

• To protect retirees, survivors, and disabled workers with income 

• Ensure hospital coverage for seniors and certain disabled individuals.  

Moreover, the Social Security wage base changes annually. Also, Medicare has no cap. In fact, knowing the current cap and rate is really important. This is because it affects your net pay and future benefits calculation. 

Components of FICA Tax 

The following are the major components of the FICA tax: 

1. Social Security Tax 

The statutory rate is now 6.2% for employees. Also, it is matched by 6.2% from employers, on wages up to the annual wage base.  In 2025, that wage base is $176,100.  

Anything above that figure is not subject to Social Security withholding. However, the employer match mirrors the employee up to the same cap. These dollars finance retirement, disability, and survivors’ benefits. 

2. Medicare Tax 

With Medicare, the standard rate is 1.45% for employees and employers. Also, there is no wage cap. Moreover, high earners might also have to pay an additional Medicare Tax of 0.9% on wages above the following thresholds: 

• $200,000 (Single individuals) 

• $250,000 (Married couples filing jointly) 

• $125,000 (Married couples filing separately) 

These are calculated based on Medicare wages and reported on Form 8959 at filing. Also, employers start withholding the extra 0.9% when any single employee’s pay crosses $200,000 in a calendar year. However, there is no employer match for this add-on. 

FICA Component Snapshot (2025) 

How Is FICA Tax Calculated? 

Step-by-Step Explanation Of FICA Tax Calculation 

The following are the steps you must follow to calculate FICA tax: 

1. Start with gross wages and split the calculation: Social Security first, Medicare second.  

2. For Social Security, apply 6.2% up to the wage base. Then, stop there.  

3. For Medicare, use 1.45% on all wages. Now, do not stop.  

If your wages exceed the Additional Medicare threshold, tack on 0.9% to the excess.  

Example 1 

​​If a worker earns $70,000: 

• ​Social Security = 6.2% of $70,000 

• ​Medicare = 1.45% of $70,000. 

​(No additional tax because the thresholds have not been crossed). ​ 

Example 2  

​​If a worker is earning $190,000: 

• ​Social Security = 6.2% of $176,100 (cap reached),  

• ​Medicare = 1.45% of $190,000. 

​(No additional Medicare until wages exceed $200,000 from that employer.)​ 

Example 3 

​​If the wage is $260,000: 

• ​Social Security = 6.2% of $176,100 

• ​Medicare = 1.45% of $260,000 

​[Additional Medicare is 0.9% of $60,000 over $200,000 (if single).]​ 

Employer Vs. Employee Contribution 

The structure is symmetrical in standard FICA. For instance, employers have to match employees’ Social Security and Medicare contributions.  

Meanwhile, self-employed individuals pay both sides under SECA. This value is 12.4% up to the Social Security base plus 2.9% for Medicare. Also, they have to pay the same additional 0.9% thresholds.  

Moreover, they can deduct the employer-equivalent portion above the line for income tax purposes. This is not a light burden, but a planning item.  

Also, make sure to budget quarterly if you freelance. Track Medicare wages if you have multiple gigs. 

The following table shows who pays what: 

Who Pays FICA Tax?

Employees’ pay via automatic withholding. Meanwhile, employers match the standard portions. Moreover, self-employed individuals pay both shares under SECA, handling them through estimated payments and the annual return.  

However, exemptions do exist in narrow lanes:  

• Certain student employees working for the school 

• Some nonresident aliens under specific visa categories 

• Particular employer types in limited cases 

Hence, always verify at the payroll source and in IRS publications, as eligibility is nuanced and situational. 

Importance of FICA Tax for Employees 

The following are the major reasons why the FICA tax is important for employees: 

1. It is a near-term subtraction with a long-term payoff.  

2. Those Social Security credits accumulate across your working years. This leads to your benefit formula later.  

3. Medicare withholding secures hospital insurance eligibility at 65 or earlier for qualifying disabilities.  

4. It reduces take-home pay now, but it also reduces future risk.  

However, the reality is stark. This is because without pooled contributions, the safety net frays. If you plan your budget, include FICA explicitly. Note that most calculators show income tax, but not always payroll taxes, in the same pane. 

Common Misconceptions About the FICA Tax 

The following are some of the most common misconceptions about the FICA tax: 

1. Confusing FICA with federal income tax. They are different laws, with different purposes and math.  

2. Believing FICA is optional or refundable. Actually, it is neither, though over-withholding for Additional Medicare can be reconciled on Form 8959.  

3. Thinking high earners escape entirely. Primarily, Social Security caps out, but Medicare does not, and the 0.9% kicks in above thresholds.  

4. Misunderstanding self-employment obligations. SECA doubles the standard load and requires deliberate cash flow management.  

A Sketched View: Income Tax Vs. Payroll Tax 

Think Long Term! 

Although the mechanics are simple, the implications are not. Essentially, the FICA tax combines two programs under one payroll umbrella. This way, it applies split rates, a moving Social Security cap, a no-cap Medicare rule, and a high-income add-on.  

Moreover, it funds Social Security and Medicare (programs most workers will rely on), and it shapes cash flow today. So, read your pay stub, and know your thresholds.  

In fact, if you are planning retirement contributions or a year-end bonus, factor FICA in alongside income tax and benefits decisions. That is how to keep the present steady and the future funded. 

Frequently Asked Questions (FAQs)

The following are some FAQs about the FICA tax: