What Does FICA Mean and How Is It Calculated?
Demystify FICA. Learn what this essential payroll tax covers, how your contributions are determined, and its impact on both employees and the self-employed.
The Federal Insurance Contributions Act (FICA) is a mandatory U.S. payroll tax. It applies to most earned income, funding significant federal programs. FICA ensures that contributions are made by both employees and employers, with deductions typically visible on a paycheck.
What FICA Is and What It Funds
FICA comprises two distinct components: Social Security tax and Medicare tax. The Social Security portion provides benefits for retirees, individuals with disabilities, and children of deceased workers.
The Medicare tax funds healthcare services for the elderly and those with certain disabilities. Medicare helps cover inpatient hospital care, skilled nursing facility care, hospice care, and some home health services. Both Social Security and Medicare taxes are a primary source of revenue for these programs, supporting millions of Americans.
Calculating FICA Contributions
FICA taxes involve specific rates applied to wages for both employees and employers. For 2025, the Social Security tax rate is 6.2% for employees and 6.2% for employers, totaling 12.4%. This Social Security tax applies only up to a certain annual earnings limit, known as the Social Security wage base, which is $176,100 for 2025. Wages earned above this threshold are not subject to the Social Security portion of FICA.
In contrast, the Medicare tax rate is 1.45% for employees and 1.45% for employers, for a total of 2.9%. There is no wage base limit for Medicare tax, all covered wages are subject to this tax. For higher earners, an Additional Medicare Tax of 0.9% applies to wages exceeding $200,000 for individuals, or $250,000 for married couples filing jointly. Employers are responsible for withholding this additional tax, but they do not match it. These FICA contributions are automatically deducted from an employee’s gross pay by their employer.
FICA for Self-Employed Individuals
Self-employed individuals are responsible for paying FICA taxes through the Self-Employment Tax (SE Tax). This tax covers both the employee and employer portions of Social Security and Medicare. The total self-employment tax rate for 2025 is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare.
The Social Security portion of the self-employment tax is applied to net earnings from self-employment up to the annual wage base limit of $176,100 for 2025. The Medicare portion, however, applies to all net earnings without a wage base limit. Self-employed individuals calculate their SE tax on 92.35% of their net earnings from self-employment. They pay this tax, along with their income tax, through quarterly estimated tax payments using Form 1040-ES. Self-employed individuals are permitted to deduct one-half of their self-employment tax when calculating their adjusted gross income.