FICA, which stands for the Federal Insurance Contributions Act, is a U.S. law that mandates payroll taxes for Social Security and Medicare. These taxes are essential for funding key government programs that provide benefits to retirees, individuals with disabilities, and those needing healthcare assistance. Understanding FICA taxes is crucial for both employees and employers to ensure compliance and proper financial planning.
Components of FICA Taxes: Social Security and Medicare
FICA taxes are comprised of two main parts: Social Security tax and Medicare tax. Each component serves a distinct purpose in supporting the U.S. social safety net.
Social Security Tax
Social Security tax, also known as old-age, survivors, and disability insurance (OASDI) tax, primarily funds Social Security benefits. These benefits include retirement income, disability benefits, and survivor benefits for families of deceased workers.
Medicare Tax
Medicare tax, also known as hospital insurance tax, funds the Medicare program, which provides health insurance for individuals 65 and older and younger people with disabilities, as well as people with End-Stage Renal Disease.
FICA Tax Rates and Wage Base Limits
The calculation of FICA taxes involves specific rates and, for Social Security, a wage base limit. These rates and limits are subject to change, so staying updated is important.
Social Security Tax Rates and Wage Base
As of the current guidelines, the Social Security tax rate is 6.2% for employers and 6.2% for employees, totaling 12.4%. It’s important to note that Social Security tax has a wage base limit, which is the maximum amount of earnings subject to the tax. For earnings in 2025, this wage base is $176,100. Earnings exceeding this limit are not subject to Social Security tax.
Medicare Tax Rates and Wage Base
The Medicare tax rate is 1.45% for both employers and employees, resulting in a total of 2.9%. Unlike Social Security tax, there is no wage base limit for Medicare tax. All covered wages are subject to Medicare tax, regardless of the income level.
Additional Medicare Tax
In addition to the standard Medicare tax, there’s an Additional Medicare Tax of 0.9%. This applies to individuals with Medicare wages exceeding a certain threshold based on their filing status. For individuals, employers are required to withhold this additional tax on wages exceeding $200,000 in a calendar year, irrespective of filing status. It’s important to note that there is no employer match for the Additional Medicare Tax, it is solely the employee’s responsibility.
Conclusion
FICA taxes are a fundamental aspect of the U.S. tax system, directly supporting Social Security and Medicare programs. Understanding “What Are Fica Taxes”, their components, applicable rates, and wage base limits is essential for both employers in managing payroll and employees in understanding their tax obligations and contributions to these vital social programs. For the most up-to-date information and detailed guidelines, it is always recommended to refer to official IRS publications such as Publication 15 (Circular E), Employer’s Tax Guide.
