The Federal Insurance Contributions Act (FICA) instituted the FICA tax in 1935 as part of its Old-Age, Survivors, and Disability Insurance (OASDI) program. Since then, this tax has applied to all taxable compensation. This includes not only wages, but also tips, commissions, bonuses, and taxable fringe benefits. For the first three decades or so, FICA tax only contributed to Social Security funds; in 1966, contributions for Medicare were added.
So, what is FICA tax? Today, FICA tax is still made up of Social Security and Medicare contributions, although the amount of each contribution has gradually increased over time. It automatically gets withheld from employees’ paychecks, and the same dollar amount is matched by employers; since 1990, FICA tax withholding for both employees and employers has been 7.65%. Self-employed workers also have to pay FICA tax, but they’re responsible for both the employee and employer portions, totaling 15.3%. However, since the majority of US workers are W-2 employees, most people only pay the employee portion of FICA tax.
When the FICA Social Security tax was created in 1935, it stood at 1% of taxable compensations - this was the amount that was withheld from employee paychecks, and also matched by employers. From 1990 to today, the Social Security contribution for both employees and employers has been 6.2% (with some exceptions). Each time payroll is run, employers must withhold this amount from each employee’s paycheck and match the same contribution. Along with Medicare tax and other income taxes, Social Security tax is sent to the IRS on a monthly or semi-weekly basis. The tax is then used to fund Social Security benefits, which include retirement, disability, survivor, and Supplemental Security Income (SSI) benefits.
Just like Social Security tax, Medicare tax is withheld from employee paychecks and matched by employers. This tax started at 0.35% in 1966, and since 1990 has been at 1.45% of taxable compensation (unless certain conditions are met). Medicare tax is withheld, matched, paid by the employer, and reported on tax returns using the same schedule that applies to Social Security tax. High earners in specific income brackets may be subject to an additional Medicare surtax, although the additional tax doesn’t apply to earnings below the surtax threshold. All FICA Medicare taxes finance part of Medicare Part A, which provides hospital insurance to seniors and people with eligible disabilities.
While a FICA tax rate of 7.65% applies to all W-2 employees, this doesn’t necessarily apply to all of their annual wages and other compensation.
Social Security tax has a wage base limit that applies to employees, and is usually adjusted for yearly inflation. The 2025 wage base limit for Social Security is $176,100; if an employee’s gross income for 2025 exceeds that amount, Social Security will no longer be withheld from their paychecks. According to the Social Security Administration (SSA), the adjusted wage base limit for 2026 is $184,500.
Since the 1st of January, 2013, high-income employees have been required to pay an additional Medicare surtax of 0.9%. If someone makes above a certain amount in a year, their Medicare tax rate is 2.35% instead of 1.45%. However, this only applies to earnings that are above the income ceiling, not to all of their gross earnings for the year. The income ceilings differ depending on the employee’s tax filing status:
While plenty of workers in the US want to know “what is FICA tax?”, the majority of them are already familiar with the concept of federal income tax. Just like FICA tax, federal income tax is withheld from employee paychecks. However, there are several key details that differentiate these two taxes from each other. For example, if you’ve ever wondered “What is FICA tax on my paycheck?” without being able to find it on your paystub, it may be that you’ve exceeded the income threshold for Social Security tax withholding. Or, you may notice an additional Medicare surtax – this could be due to having a higher income.
Federal income tax, on the other hand, applies to every income bracket and many different types of income, including wages, tips, dividends, short-term capital gains, dividends, pensions, annuities, and more. Unlike FICA tax, which is matched by the employer, federal income tax is the sole responsibility of the employee. The good news is that it may be eligible for various credits and deductions, such as charitable donations, mortgage interest, or student loan interest. In contrast, FICA tax is never eligible for credits or deductions.
Whether an employee is salaried or paid by the hour, FICA taxes are calculated based on a percentage of the amount on each paycheck. For example, consider a hypothetical employee who gets paid $4,000 every two weeks, resulting in an annual salary of $104,000. Their Social Security tax rate would be 6.2%, and their Medicare tax rate would be 1.45%. Here’s how their FICA taxes would be calculated:
If employees exceed the income threshold for Social Security contributions or qualify for a Medicare surtax, it’s the employer’s responsibility to adjust their employee’s paychecks accordingly. It can be difficult to manage various employees and their information, so let us help. Thread can support your HR department with consulting services today.
Employers must match the FICA contributions of each employee, sending the same dollar amount according to IRS schedules. It’s also important to accurately report FICA withholdings and matching contributions on federal tax returns, as well as on end-of-year wage statements that are sent to the IRS and to employees.
Although nearly all workers in the US are required to pay FICA tax, some people are exempt.
Just like employers are responsible for paying their employees accurately, they’re also responsible for withholding the correct amount of FICA tax. Employers should be aware of IRS regulations regarding FICA tax, even if those regulations don’t currently apply to their employees. If or when an employee meets a certain income threshold, is eligible for an exemption, or qualifies for some other exception, employers need to adjust FICA withholding as needed. If this isn’t done, then the employer could be subject to fines or other penalties from the IRS, and the employee may have to revise their tax filing or even pay additional taxes.
Employers have to follow a monthly or semi-weekly depositing schedule for FICA tax (among other payroll taxes), depending on how their business is categorized by the IRS. These payments can be made through electronic funds transfers (EFTs), such as the Electronic Federal Tax Payment System (EFTPS), an automated clearing house (ACH) transfer, or through a trusted payroll service.
The best way to avoid penalties is to stay in compliance with tax regulations, usually with the help of a certified public accountant (CPA) or accounting team. IRS regulations are quite complicated, and state-level regulations add another layer of complexity to the mix. If even a simple mistake is made, IRS penalties can be harsh and swift. These include fines, audits, and increased oversight to ensure regulations are being met. There are certain costs to ensuring tax compliance and avoiding penalties, but it’s often even more expensive to bring a business back into compliance after finding an error.
Federal tax regulations seem to get more convoluted every year, and for many employers, saving money by not hiring payroll experts isn’t worth the risk of making a mistake. Some employers (mainly small businesses) take on the responsibility themselves, but most rely on experienced professionals to handle payroll, reporting, and other tax matters. In other words, an ounce of prevention is worth a pound of cure, especially when it comes to tax compliance.