The Federal Insurance Contributions Act (FICA) tax is a mandatory payroll deduction in the United States. It’s essential to understand what this tax is, as it directly impacts your take-home pay and funds crucial government programs. In essence, FICA tax is the collective term for Social Security and Medicare taxes, both of which are vital for providing benefits to retirees, the disabled, and those needing healthcare.
Breaking Down FICA: Social Security and Medicare Taxes
FICA isn’t a single tax but rather a combination of two distinct taxes: Social Security tax and Medicare tax. Each of these taxes has its own purpose and rate.
Social Security Tax
Social Security tax is designed to fund the Social Security program, which provides benefits to retirees, disabled individuals, and survivors of deceased workers.
- Current Rate: The Social Security tax rate is currently set at 6.2% for both the employer and the employee, totaling 12.4%.
- Wage Base Limit: It’s important to note that Social Security tax has a wage base limit. This means that you only pay Social Security tax on earnings up to a certain amount each year. For instance, for earnings in 2025, the wage base limit is $176,100. Any income earned above this limit in 2025 is not subject to Social Security tax.
Medicare Tax
Medicare tax funds the Medicare program, which provides health insurance for seniors and certain younger people with disabilities.
- Current Rate: The Medicare tax rate is 1.45% for both the employer and the employee, resulting in a total of 2.9%.
- No Wage Base Limit: Unlike Social Security tax, there is no wage base limit for Medicare tax. This means all of your covered wages are subject to Medicare tax, regardless of your income level.
Additional Medicare Tax
In addition to the standard Medicare tax, there’s also an Additional Medicare Tax. This is applied to high-income earners.
- Additional Rate: A 0.9% Additional Medicare Tax is applied to individual’s Medicare wages exceeding a certain threshold.
- Threshold: Employers are required to withhold this additional tax on wages exceeding $200,000 in a calendar year, irrespective of filing status.
- Employer Responsibility: Employers start withholding this additional tax in the pay period when an employee’s wages surpass $200,000 and continue throughout the calendar year. It’s crucial to note that there is no employer match for the Additional Medicare Tax; it’s solely the employee’s responsibility.
Understanding FICA for Financial Planning
Understanding FICA tax is crucial for both employees and employers. For employees, it’s essential to recognize these deductions on your paystub and understand where this money is going. For employers, accurate withholding and remittance of FICA taxes are legal obligations. Knowing the FICA tax rates and wage base limits helps in financial planning and understanding your overall tax obligations and benefits provided by these contributions.
