FICA Stands for Federal Insurance Contribution Act: What You Need to Know
Understand how FICA taxes fund Social Security and Medicare, how they apply to employees and the self-employed, and what to do if adjustments are needed.
The Federal Insurance Contributions Act (FICA) is a key part of the U.S. tax system, funding Social Security and Medicare programs that support retirees, disabled individuals, and certain dependents. Nearly every worker sees FICA taxes deducted from their paycheck, but many may not fully understand what these deductions cover.
Since both employees and employers share the responsibility for these contributions, it’s important to understand how FICA works and how it affects earnings. Self-employed individuals also have specific obligations under this law.
Taxes Under the Act
FICA taxes consist of Social Security and Medicare taxes, which are deducted from wages as a percentage of earned income. These contributions fund government programs that provide financial and healthcare benefits.
Social Security Provisions
The Social Security portion of FICA funds benefits for retirees, disabled individuals, and certain dependents of deceased workers. Employees pay 6.2% of their wages, and employers match this amount, bringing the total contribution to 12.4%. However, this tax only applies to income up to a specific limit, known as the wage base limit, which is adjusted annually. In 2024, the wage base is $168,600, meaning earnings above this threshold are not subject to Social Security tax.
These contributions go into the Social Security Trust Fund, which operates on a pay-as-you-go basis, meaning current workers’ contributions fund payments to current beneficiaries.
Medicare Provisions
Medicare taxes fund hospital insurance and certain medical services for individuals aged 65 and older, as well as some younger individuals with disabilities. Unlike Social Security taxes, Medicare taxes apply to all earnings without an income cap. Employees pay 1.45%, and employers match this amount, for a total of 2.9%. These funds primarily support Medicare Part A, which covers inpatient hospital stays, skilled nursing facility care, and hospice services.
Additional Medicare Deductions
High earners pay an extra Medicare tax of 0.9% on wages exceeding certain thresholds. This Additional Medicare Tax applies to earnings above $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately. Unlike standard Medicare taxes, employers do not match this additional amount.
Employers must withhold this tax once an employee’s wages surpass $200,000 in a calendar year, regardless of the employee’s total household income. If too much or too little is withheld, adjustments can be made when filing an annual tax return. This tax applies only to wages and self-employment income, not investment earnings or other forms of income.
Employer and Employee Withholding
Employers are responsible for deducting FICA taxes from employee wages and submitting these amounts, along with their own matching contributions, to the IRS. This occurs through payroll withholding. Employers must ensure accurate calculations and timely deposits to avoid penalties.
Businesses use the Electronic Federal Tax Payment System (EFTPS) to submit withheld taxes. The IRS determines deposit schedules based on an employer’s total tax liability, classifying them as either monthly or semiweekly depositors. Companies with over $50,000 in employment taxes during a lookback period must follow a semiweekly schedule, meaning deposits are due within a few days of payroll issuance. Smaller employers with lower tax liabilities may qualify for monthly deposits, due by the 15th of the following month.
Payroll tax reporting is handled through IRS Form 941, the Employer’s Quarterly Federal Tax Return, which details wages paid, taxes withheld, and the employer’s share of contributions. Employers must also provide employees with Form W-2 each year, summarizing total earnings and withheld taxes.
Self-Employed Requirements
Self-employed individuals must cover both the employee and employer portions of FICA taxes through the self-employment tax. This tax applies to net earnings from self-employment, including income from freelancing, independent contracting, and business ownership, minus allowable deductions.
Self-employment tax is calculated using Schedule SE (Form 1040). In 2024, the rate remains 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies only to the first $168,600 of net earnings, while Medicare taxes apply to all earnings. Those exceeding $200,000 in net self-employment income ($250,000 for married couples filing jointly) must also pay the Additional Medicare Tax of 0.9%.
Since self-employed individuals do not have paycheck withholdings, they must make estimated tax payments quarterly using Form 1040-ES. These payments cover both self-employment tax and income tax obligations. The IRS requires payments by April 15, June 15, September 15, and January 15 of the following year. Underpayment can result in penalties and interest.
Noncompliance Consequences
Failing to meet FICA tax obligations can lead to financial penalties and legal consequences. The IRS enforces strict payroll tax compliance, and unpaid or underpaid amounts can accumulate interest and penalties. Employers who fail to withhold or deposit the correct amounts may be subject to the Trust Fund Recovery Penalty (TFRP), which holds responsible individuals personally liable for unpaid taxes. Under Internal Revenue Code 6672, this penalty can equal 100% of the unpaid FICA taxes, meaning a business owner, payroll manager, or financial officer could be required to pay the entire outstanding balance from personal funds.
Using withheld payroll taxes to cover operating expenses is a serious violation. Unlike other debts, unpaid payroll taxes cannot be discharged in bankruptcy, and the IRS has broad authority to enforce collection. This includes issuing federal tax liens, levying bank accounts, garnishing wages, and seizing assets. Criminal charges can also be filed in cases of willful tax evasion, with potential penalties including fines and imprisonment under Internal Revenue Code 7202.
Seeking Adjustments to Withheld Amounts
Errors in FICA tax withholding can occur due to miscalculations, incorrect income reporting, or changes in an employee’s tax situation. Employees who notice discrepancies in their paychecks should first address the issue with their employer. Businesses can correct withholding mistakes through payroll adjustments and use Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return, to amend previously reported FICA taxes.
If an employer does not correct an over-withholding issue, employees may claim a refund when filing their annual tax return. Excess Social Security tax withheld due to multiple employers can be recovered by reporting the overage on Form 1040. Medicare over-withholding, including the Additional Medicare Tax, is reconciled through tax filings. If an employer fails to remit withheld taxes to the IRS, employees are not held liable, but businesses may face penalties and enforcement actions.