How to Calculate FICA Tax for Employees & Self-Employed

The Federal Insurance Contributions Act, commonly known as FICA, mandates a payroll tax that funds two federal programs: Social Security and Medicare. Social Security provides benefits for retirees, the disabled, and survivors of deceased workers. Medicare is the federal health insurance program for individuals aged 65 or older, younger people with certain disabilities, and people with End-Stage Renal Disease. Understanding FICA taxes is important for both employees, who see it withheld from their paychecks, and self-employed individuals, who are responsible for calculating and paying these taxes themselves.

FICA Tax Components and 2023 Rates

FICA tax comprises two distinct components: Social Security tax and Medicare tax. Each component has specific rates and rules for application. The Social Security tax rate is 6.2% for both the employee and the employer, totaling 12.4% of wages. This portion of the tax is subject to an annual wage base limit, meaning earnings above this threshold are not taxed for Social Security purposes. The 2023 Social Security wage base limit is $160,200.

The Medicare tax component operates differently. The Medicare tax rate is 1.45% for both the employee and the employer, resulting in a combined rate of 2.9%. Unlike Social Security, there is no wage base limit for Medicare tax; all covered wages are subject to this tax.

An additional Medicare Tax may also apply to high-income earners. This supplementary tax is 0.9% and is levied on wages exceeding specific thresholds. The Additional Medicare Tax applies to wages, self-employment income, or a combination of both that exceed $200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for married individuals filing separately. Employers are generally required to begin withholding this additional tax once an employee’s wages surpass $200,000, regardless of their marital status. Employers do not contribute to this Additional Medicare Tax.

Calculating FICA for Employees

FICA taxes for employees are typically calculated and withheld from their gross wages by their employer. This withholding process ensures an employee’s share of Social Security and Medicare taxes is paid. The employer is responsible for remitting both the employee’s withheld portion and their own matching contribution to the Internal Revenue Service (IRS).

To calculate the Social Security tax, the employer applies the 6.2% rate to the employee’s gross wages, up to the annual wage base limit. For example, if an employee earns $5,000 in a pay period, $310 (6.2% of $5,000) would be withheld for Social Security tax, assuming they have not yet reached the $160,200 wage base limit.

The Medicare tax calculation is simpler as it applies to all gross wages without any limit. The employer withholds 1.45% of an employee’s entire gross wages for Medicare tax. Using the previous example, an employee earning $5,000 would have $72.50 (1.45% of $5,000) withheld for Medicare tax.

For employees whose wages exceed the Additional Medicare Tax thresholds, an extra 0.9% is withheld from earnings above those limits. For instance, if a single employee’s wages for the year surpass $200,000, the employer will begin withholding an additional 0.9% on the amount over that threshold. This means the Medicare tax rate on those higher earnings becomes 2.35% (1.45% regular + 0.9% additional).

Calculating FICA for Self-Employed Individuals

Self-employed individuals are responsible for paying self-employment tax, often referred to as SE tax, which covers both the employee and employer portions of FICA. This combined tax rate is 15.3% of net earnings from self-employment, consisting of 12.4% for Social Security and 2.9% for Medicare. The self-employment tax is reported on Schedule SE (Form 1040), Self-Employment Tax.

To determine the amount subject to SE tax, self-employed individuals first calculate their net earnings from their business activity. Generally, 92.35% of these net earnings are subject to self-employment tax. This adjustment accounts for the employer’s share of FICA taxes that a traditional employee’s employer would normally pay. For instance, if a self-employed individual has $50,000 in net earnings, the amount subject to SE tax would be $46,175 ($50,000 0.9235).

The 12.4% Social Security portion of SE tax applies up to the annual wage base limit of $160,200. The Medicare portion, at 2.9%, applies to all adjusted net earnings without limit.

A significant aspect of self-employment tax is the deduction allowed for one-half of the self-employment taxes paid. This deduction is taken on Form 1040 to arrive at adjusted gross income, reducing the overall income tax liability. For example, if the total calculated SE tax is $7,064.78, then $3,532.39 ($7,064.78 / 2) would be deductible from gross income.

Common Scenarios in FICA Calculation

When an individual has income from multiple sources, the application of FICA taxes can involve specific considerations. One common scenario involves an employee working for multiple employers within the same tax year. Each employer is required to withhold Social Security tax up to the annual wage base limit, which can lead to an overpayment if combined earnings from all employers exceed the $160,200 limit. If an employee overpays Social Security tax due to multiple employers, they can claim a refund for the excess amount when filing their annual income tax return.

Individuals who have both W-2 wages and self-employment income also face unique FICA calculation rules. The Social Security wage base limit applies to the combined total of W-2 wages and net earnings from self-employment. The W-2 wages are considered first for the Social Security wage base, and then any remaining portion of the limit is applied to the self-employment income. For example, if an individual earns $100,000 in W-2 wages and $80,000 in net self-employment income, Social Security tax would be fully applied to the $100,000 wages. The remaining $60,200 ($160,200 – $100,000) of the wage base would then be applied to the self-employment income, with Social Security tax levied on $60,200 of the $80,000 self-employment earnings.

The Additional Medicare Tax also comes into play for high earners with various income streams. This 0.9% tax applies to the combined total of wages, self-employment income, and other compensation that exceeds the specified income thresholds. While employers withhold this tax from wages exceeding $200,000, individuals with substantial self-employment income or a combination of income types might need to make estimated tax payments to cover their Additional Medicare Tax liability. This ensures that the appropriate amount of tax is paid throughout the year, preventing a large tax bill or potential penalties at tax filing time.