If you've ever looked at your paycheck, you've probably seen the term "FICA" next to some money being taken out of your earnings. Since you're paying a portion of it, it's only natural to wonder, "What does FICA mean?"

An abbreviation for the Federal Contributions Insurance Act, FICA is a program that takes money from a person's earnings to fund the Social Security and Medicare programs. You'll qualify for these benefits when you retire as long as you pay a minimum FICA tax during your working years.

What Is the Federal Insurance Contributions Act (FICA)?

You were likely assigned a Social Security number at some point in childhood, which stays with you for your entire life. The government uses this number to track the taxes you pay on the money you earn.

Although part of your taxes goes toward funding government services, a large portion is set aside for your future. This is governed by the Federal Insurance Contributions Act (FICA), which was created to protect U.S. workers. Is FICA Social Security? Not exactly, but your FICA payments go into the Social Security system.

FICA Contributions

When someone asks, "What is FICA tax?" the answer depends on whether an employee or an employer is asking it. If you're an employer, you must know what taxes to withhold from your employees' salaries. You're also responsible for paying a portion of each employee's FICA contributions from your business account.

As an employee, you’ll see the money coming out of each paycheck on a line that reads “FICA.” The FICA tax rate is subject to change from one year to the next, but currently, you’ll pay 6.2 percent of your earnings to Social Security, while your employer kicks in another 6.2 percent. That means 12.4 percent of your earnings is going into the Social Security program, with only 6.2 percent paid by you.

However, the current FICA rate doesn't just include your Social Security contributions. You’ll need to also put money into Medicare. Currently, you’ll see 1.45 percent withdrawn from our pay to go toward Medicare, and your employer will pay another 1.45 percent.

Your annual income also impacts how much FICA you pay. If you earn more than $200,000 in a tax year, your employer has to withhold another 0.9 percent from your pay for Medicare. But the good news is, if you earn $142,800, you’ll only pay Social Security tax on the first $142,800 for 2021.

But what if you're self-employed? If you don't have an employer, no one can handle FICA on your behalf. You’ll need to pay the FICA percentage on your earnings, 15.3 percent, in something called a self-employment tax. This 15.3 percent includes 12.4 percent for Social Security and 2.9 percent for Medicare. The IRS advises you to pay taxes on your earnings in quarterly installments, called estimated taxes, to avoid owing penalties at tax times.

History of FICA

An important part of grasping the meaning of FICA is understanding how it originated. That takes us back to the early 20th century when the Great Depression made it clear that the U.S. government needed a way to care for its citizens.

The question, "What is FICA?" started in the mid-1930s when President Franklin D. Roosevelt introduced something called Social Security. The Social Security Act of 1935 was written specifically to provide payments to those aged 65 and older, as well as widows with dependent children and those with disabilities, rendering them unable to work.

In addition to changes in the amount of FICA tax from year to year, the program itself has evolved over the years. Initially, payments were made in a lump sum, but that eventually switched to regular payments. In 1965, President Lyndon B. Johnson added health insurance to FICA, establishing the programs we now know as Medicare and Medicaid.

Your payroll FICA deduction isn't the only thing that changes. Although it's far less frequent, the retirement age has also increased. At one time, everyone was eligible to apply for Social Security payments at 65. Now, you'll probably need to be 67 to qualify for full retirement benefits. Those born before 1960 can retire at 66 and receive full benefits. There is an option to retire as early as age 62 with permanently reduced benefits.

How FICA is Calculated

FICA withholding can change from one year to the next, but as long as you know the amounts for the current tax year, you can estimate how much of your salary will come out.

For employers, once the FICA definition has been squared away, you’ll need to determine exactly how much to deduct from each check. It’s simply a calculation based on the employee’s gross pay for each pay period. So if your employee grossed $500, you’ll multiply $500 by 6.2 percent to get the amount to deduct from that employee’s pay. You’ll also need to match that amount from your own funds. For the Medicare portion, multiply $500 by 1.45 percent.

The employer’s FICA calculation breaks down like this:

• $500 x 6.2 percent = $31
• $500 x 1.45 percent = $7.25

Final Thoughts

Now that you know what FICA stands for and what it is, you can plan your future paychecks based on what your net earnings will be. The next useful step is to sit down with a Certified Financial PlannerⓇ and map out a plan for retirement. This will help you ensure that you’re making the most of your working years so that you can someday retire comfortably.

Frequently Asked Questions

What is FICA?

The Federal Insurance Contributions Act (FICA) is a United States federal law that mandates a payroll tax on both employees and employers to fund Social Security and Medicare programs. These programs provide benefits for retirees, the disabled, and children of deceased workers.

How is FICA tax calculated?

FICA tax is split into two parts: Social Security and Medicare. For Social Security, a 12.4% tax is assessed on wages up to a certain limit, which is split evenly between employers and employees (6.2% each). For Medicare, a 2.9% tax applies to all wages, also divided equally between employers and employees (1.45% each). Self-employed individuals pay the full amount themselves but can deduct the employer portion on their income tax returns.

Is there a wage limit for FICA taxes?

Yes, for the Social Security portion of FICA, there is a wage cap, which changes annually based on inflation. For 2024, this cap is set at $147,000, meaning income above this threshold is not subject to Social Security tax. However, there is no wage limit for the Medicare portion of FICA.

What is the Additional Medicare Tax?

The Additional Medicare Tax applies to individuals earning above a certain threshold ($200,000 for single filers and $250,000 for married couples filing jointly). This is an extra 0.9% tax on wages exceeding these amounts, paid solely by the employee.

Who is exempt from paying FICA taxes?

Certain groups may be exempt from paying FICA taxes, including some students working at their university, religious groups that oppose Social Security benefits, and nonresident aliens on specific types of visas.

Can I opt out of paying FICA taxes?

Most employees cannot opt out of paying FICA taxes as they are mandatory. However, specific groups with religious or moral objections to public insurance may be exempt if they meet stringent IRS criteria.

How do FICA taxes benefit me?

FICA taxes fund Social Security and Medicare, which provide benefits for retirees, disabled individuals, and survivors of deceased workers. Paying into FICA ensures you and your family are eligible for these benefits in the future.

What happens if I don't pay FICA taxes?

Not paying FICA taxes can result in penalties and interest from the IRS. Additionally, failing to contribute to Social Security may affect your eligibility for benefits in retirement or disability.

How do I know if FICA taxes are being deducted from my paycheck?

You can verify FICA tax deductions by reviewing your pay stub. It should itemize FICA deductions under Social Security and Medicare taxes.