Federal Insurance Contributions Act (FICA): What It Is, Who Pays

What Is the Federal Insurance Contributions Act (FICA)?

The Federal Insurance Contributions Act (FICA), enacted in 1935, mandates that both U.S. wage earners and their employers contribute a portion of earnings to fund Social Security and Medicare. These contributions ensure that individuals receive financial and health benefits in their retirement years

Notably, the self-employed are also required to contribute under the Self-Employment Contributions Act (SECA) of 1954, effectively paying both the employee and employer portions. FICA represents a foundational element of the U.S. social safety net, maintaining stability and support for future generations.

How FICA Tax Impacts Your Paycheck

The Evolution of FICA: From Social Security to Medicare

In 1935, the United States Congress passed the Federal Insurance Contributions Act, known as FICA. Its purpose was to collect contributions to fund the new Social Security program established by the administration of President Franklin D. Roosevelt in the same year.

Roosevelt believed that the money collected from all working Americans through FICA would belong directly to them. He didn't want the financial benefits for their retirement, disability, or death to depend on federal revenue. He feared that politicians would take and use the money for their own purposes.

In 1965, the payroll tax to fund health care benefits was added when Medicare was signed into law by President Lyndon B. Johnson.

FICA contributions are mandatory. Although the rate is set annually, it has mostly stayed the same since 1990. The limit changes each year based on the National Average Wage Index.

Navigating FICA Rates and Limits for 2023 and 2024

According to the Internal Revenue Service (IRS), FICA taxes include Social Security taxes (old-age, survivors, and disability insurance) and Medicare taxes (hospital insurance). Each applies different rates.

There's a maximum wage base for Social Security taxes on earnings, above which no tax is levied. The wage base is set at $160,200 for 2023 and $168,600 for 2024.

There is no wage base limit for Medicare taxes.

For 2023 and 2024, the total Social Security tax rate of 12.4% is split between employee and employer. The employee and employer each pay 6.2%.

The total Medicare tax rate of 2.9% is also split between employee and employer. The employee pays 1.45% and the employer pays 1.45%.

Employees pay an extra 0.9% Medicare tax on wages over a certain threshold. For 2023 and 2024, that amount is $200,000 for individuals ($250,000 for married couples filing jointly). So, an employee's Medicare tax could be as high as 2.35%, depending on their wages. Employers are not required to match the additional Medicare tax.

What Self-Employed Individuals Need to Know About SECA

Under SECA, the self-employed pay both the employee and employer portions of the Social Security and Medicare taxes. For example, as a sole proprietor, you'd be responsible for paying 12.4% of your income toward Social Security and 2.9% toward Medicare.

Additionally, you'd pay an extra 0.9% Medicare tax on self-employment income above the threshold.

Though they pay more than wage earners, self-employed individuals do get a tax break. They can deduct half, representing the employer's share, as a business expense.

Calculating Your FICA Contributions: Step-by-Step Guide

Example 1

An employee earning $50,000 will pay $3,825 in FICA contributions in 2024. That breaks down to $3,100 in Social Security tax and $725 in Medicare tax. The wage earner's employer would pay the same amount.

How it's calculated:

Social Security tax = $50,000 x .062 (the employee rate of 6.2%) = $3,100

Medicare tax = $50,000 x .0145 (the employee rate of 1.45%) = $725

Total FICA = $3,825 ($3,100 + $725)

Example 2

An employee earning $250,000 and filing singly will pay $14,528.20 in FICA contributions in 2024. That breaks down to $10,453.20 in Social Security tax, $3,625 in Medicare tax, and $450 in additional Medicare tax. The wage earner's employer would pay slightly less because they aren't required to pay the additional Medicare tax of 0.9% on the $50,000 above the $200,000 threshold.

How it's calculated:

Social Security tax = $168,600 (wage base limit) x .062 (the employee rate of 6.2%) = $10,453.20

Medicare tax = $250,000 x .0145 (the employee rate of 1.45%) = $3,625

Additional Medicare tax = $50,000 x .009 (the total rate of 0.9%) = $450

Total Medicare taxes = $4,075 ($3,625 + $450)

Total FICA = $14,528.20 ($10,453.20 + $4,075)

Special Considerations

According to the Congressional Budget Office, it's estimated that the Social Security Trust Fund will run out of the money needed to make monthly Social Security payments in 2033. This would occur because revenues received into the program will not be enough to cover payments from it.

That imbalance will be due to the growing population of recipients of Social Security benefits and a shrinking workforce that's needed to fund the program with FICA taxes. Policymakers are considering various actions to fix this. Possible solutions include raising the retirement age, cutting benefits for high earners, or raising the payroll tax rate.

The Bottom Line

FICA refers to the 1935 U.S. law and later the 1965 law that mandated that payroll taxes be paid by workers and employers to fund the nation's Social Security and Medicare programs. FICA taxes are mandatory.

From then until now, American wage earners have had a portion of every paycheck withheld throughout their working years so that they can receive financial benefits from the government in their retirement years.