What Is the Federal Insurance Contributions Act?

The Federal Insurance Contributions Act (FICA) is a U.S. federal payroll tax deducted from the paychecks of most employees, with a matching amount paid by their employers. The funds are designated to finance two social insurance programs: Social Security and Medicare. FICA is composed of two taxes. The first funds the Social Security program, which provides retirement, disability, and survivor benefits to eligible workers and their families. The second tax funds Medicare’s Hospital Insurance (HI) program, also known as Part A, which helps cover inpatient hospital care for individuals aged 65 and older and for some younger people with disabilities.

The Components of FICA Tax

The Social Security tax, officially known as the Old-Age, Survivors, and Disability Insurance (OASDI) tax, is levied at a rate of 6.2% on an employee’s wages. These funds are directed to the Social Security Administration to pay for benefits, including monthly payments to retirees, individuals with disabilities, and the surviving spouses and dependents of deceased workers.

The Social Security tax has an annual wage base limit, which is adjusted for inflation and establishes the maximum earnings subject to the tax. For 2025, the wage base limit is $176,100. Once an employee’s earnings surpass this threshold, the 6.2% Social Security tax is no longer withheld for the remainder of the year. The maximum an employee will contribute in 2025 is $10,918.20.

The second FICA component is the Medicare tax, which funds the Hospital Insurance (HI) program. This tax is applied at a rate of 1.45% on all of an employee’s covered wages. The funds support Medicare Part A, which helps pay for services like inpatient hospital stays, skilled nursing facility care, hospice care, and some home health care.

In contrast to the Social Security tax, the Medicare tax does not have a wage base limit. Every dollar of an employee’s compensation is subject to the 1.45% Medicare tax, regardless of how high their income is. This ensures that all earners contribute to the hospital insurance program throughout the year.

How FICA is Calculated and Paid

The total employee FICA tax rate is 7.65%, combining the Social Security and Medicare taxes. This amount is calculated on gross wages and withheld directly from an employee’s paycheck by their employer. The deduction is itemized on their pay stub, often labeled as “Social Security” and “Medicare” or “OASDI” and “HI.”

Employers must withhold the employee’s 7.65% share from wages and pay a matching amount from the company’s own funds. This brings the total FICA contribution to 15.3% of an employee’s wages. The employer is responsible for remitting both the employee’s withheld portion and their own matching contribution to the IRS on a semi-weekly or monthly basis.

The rules for self-employed individuals are governed by the Self-Employment Contributions Act (SECA). A self-employed person is considered both the employee and employer, so they are responsible for paying both portions of the tax. The SECA tax rate is 15.3%, combining 12.4% for Social Security up to the annual wage base limit and 2.9% for Medicare.

To account for the employer portion, self-employed individuals can deduct one-half of their total self-employment tax when calculating their adjusted gross income (AGI). This is an “above-the-line” deduction, meaning it can be claimed even if the taxpayer does not itemize. Self-employed individuals pay their SECA taxes through quarterly estimated tax payments using Form 1040-ES.

The Additional Medicare Tax

A surtax known as the Additional Medicare Tax applies to high-income earners. Implemented as part of the Affordable Care Act, this is an extra 0.9% tax levied on wages, compensation, and self-employment income that exceeds certain thresholds based on a taxpayer’s filing status.

The income thresholds for this tax are not indexed for inflation. The tax applies to income over $200,000 for Single, Head of Household, or Qualifying Widow(er) filers. The threshold is $250,000 for those Married Filing Jointly and $125,000 for those Married Filing Separately.

This tax is paid only by the employee, with no corresponding employer match. Employers must begin withholding the 0.9% tax from an employee’s pay once their wages exceed $200,000 for the year, regardless of the employee’s filing status. Taxpayers may need to make estimated tax payments or request additional income tax withholding using Form W-4 if their withholding does not cover their total tax liability, such as when they have multiple income sources or are self-employed.

FICA Tax Exemptions

While FICA taxes are mandatory for most workers, exemptions exist for certain categories of individuals and types of work.

• Students who work at the school, college, or university where they are enrolled and regularly attending classes. For the exemption to apply, the student’s employment must be secondary to their studies.
• Certain non-resident aliens who are temporarily in the United States on specific nonimmigrant visas, such as F-1, J-1, M-1, or Q-1. This exemption is limited to the first five calendar years for students and the first two for scholars and teachers.
• Members of recognized religious sects with established tenets that conscientiously object to accepting benefits from public or private insurance. These individuals must file Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits, for IRS approval.
• Some state and local government employees who participate in a qualifying public retirement system that acts as an alternative to Social Security. This exemption may only apply to the Social Security portion of FICA.