FICA Taxes Explained: Meaning, Rates, Calculation & Exemptions

Every month, a certain amount is cut off from your paycheck. If you’ve been wondering where that money goes, the good news is, it is in your own favor. As per the US rule, FICA taxes are a mandatory payroll contribution by both employees and employers, funding the federal benefit programs – Social Security and Medicare. 

We have explained the FICA taxation limit, FICA tax meaning, and more in this blog. So read till the end to understand better!

Key Takeaways: 

• Social Security and Medicare are funded by FICA. 
• The total contribution is 15.3%, divided between the employer and employee. 
• The wage cap of Social Security is $176,000 in the year 2025. 
• There is no wage limit on medicare but high earners are charged an additional 0.9%. 
• The entire amount of 15.3% is paid by the self-employed under SECA. 
• Retirement and Medicare benefits are based on the FICA contributions.

What are FICA Taxes?

FICA is an abbreviation of the Federal Insurance Contributions Act, which is a federal law that mandates the payment of payroll taxes to finance the Social Security and medicare schemes. It was initially introduced in 1935 under the Social Security Act and subsequently in 1965 under the Medicare Act. 

Simply speaking, FICA is a compulsory payroll tax system that requires those who are working to pay into retirement, disability, survivor, and healthcare benefits. 

Any earned and received wages or salary as a result of employment are automatically taxed using FICA taxes and reported using your Social Security number. Such investments accumulate your benefits in the future. The meaning of FICA tax is the payroll tax that is paid on earned income in order to fund the social security and Medicare programs at the federal level. 

2025 FICA Tax Rates

The overall FICA tax rate is 15% that is equally divided between the employer and the employee. This division will guarantee that both parties have a share in the financing of federal insurance programs. 

Here’s a breakdown of the FICA taxes:

Type of Tax	The employee has to pay	The employer has to pay	Wage Limit in 2025
Social Security	6.2%	6.2%	$176,100
Medicare	1.45%	1.45%	No limit
Total	7.65%	7.65%	–

Now, here are some key points to remember: 

• The total contribution is 15.3%.
• It is a legal obligation of members to correspond with the contributions of the employees. 
• Most of the rates would be constant for most income levels, with the exception of wage caps. 

Also Read: Purchase Price Variance: Importance, Formula, Examples, Affecting Factors, and Much More

All About Social Security Tax 

The social security element supports retirement benefits, disability (SSDI), and survivor benefits. However, unlike Medicare, it has an annual earnings limit. 

For 2025: 

The tax rate is 6.2%, and the wage base limit is $176,100.

After your income surpasses the wage limit mark in 2025, social security tax ceases to be withheld from the remainder of the calendar year. This is referred to as hitting the taxable maximum. 

So, the maximum social security contribution 

$176,100 × 6.2% = $10,918.20

The maximum contribution would be $10,918.20 by both the employee and the employer. 

This limit is updated yearly depending on wage growth and inflation in the countries. 

Medicare Tax Explained 

Medicare tax contributes to the financing of healthcare services for persons who are 65 and above, along with people who are below 65 and have disabilities. 

Unlike Social Security: 

• There is no income cap. 
• The Medicare tax is paid on all the earned wages. 

These are the standard Medicare rates: 

• 1.45% (employee)
• 1.45% (employer)
• 2.9% total

An additional medical care tax for high-income earners is counted when the income surpasses a certain amount, and the employees are required to remit an increment of 0.9% in addition to the existing income tax. 

Filing Status Threshold: 

Single = $200,000

Married Filing Jointly = $250,000

Married Filing Separately = $125,000

Please note that: 

• The 0.9% is only applied to the employee. 
• Employers are required to withhold after the wages surpass $200,000 with the same 1.45%, irrespective of whether they are filed or not. 
• This supplementary tax does not have a corresponding taxpaying employer. 

How to Calculate FICA Tax?

The calculation of FICA tax is not quite difficult since it is determined by fixed percentages. This tax is imposed on the FICA taxable wages of the employee, which usually are the salary, hourly pay, bonuses, commissions, and tips. 

FICA consists of two parts: 

• Social security tax: 6.2%
• Medicare tax: 1.4%
• Total employee portion: 7.65%
• Employer matches the same 7.65%

Based on these values, here’s the step-by-step calculation:

• First, determine the gross taxable wages during the pay period. 
• Wages are multiplied by 6.2% in social security. 
• Multiply wages by 1.45% in Medicare. 
• Add both of the wages together to get the FICA deduction. 
• The employer will have to add the same amount as the FICA contribution. 

Let’s understand it with an example. Assume your monthly salary is $5,000. 

Component	Formula	Amount
Social Security	$5,000 × 6.2%	$310
Medicare	$5,000 × 1.45%	$72.50
Total Employee FICA	–	$382.50
Employer Match	–	$382.50
Total Contribution	–	$765

When you do the FICA taxes calculation, here are a few important points to note: 

• The 6.2% social security tax ceases once an employee reaches a cap of 2025 on the amount of money they can earn, which is $176,100.
• Medicare tax does not have a wage cap. 
• For employees, there is an extra 0.9% Medicare levy on the high earners over $200,000. 
• The payroll systems are used by most employers to automate these calculations; however, knowing the formula can enable you to identify the paycheck accuracy. 

FICA Tax Exemptions 

Even though FICA taxes are applicable to the majority of workers in the USA, some people can qualify for tax exemptions according to the IRS regulations. 

Who is exempt from FICA taxes:

• Some nonresident people who are temporarily employed in the US. 
• Students on F-1, J-1, or M-1 visas, who normally do not stay longer than five calendar years. 
• Students who have been employed by their university, if enrolled and attending classes regularly. 
• Individuals in the religious sects were not qualified to obtain public insurance benefits. 
• Tip income under $20 per month. 

Key Considerations: 

• Exemptions do not just come on automatically; you need properly recorded documents. 
• FICA requirements can start once the visa or student status requests are changed. 
• Employers should ensure that they are eligible to evade penalties.

FICA Taxes vs Federal Income Tax

It is very common to confuse FICA with federal tax; however, both of these taxes serve different purposes and are applicable for different reasons. Let’s clear the difference here: 

Basis	FICA Tax	Federal Tax
Purpose	Funding Social Security & Medicare	Funding government operations
Rate	Asks Flat Percentage	Depends on progressive tax brackets.
Employer Contribution	Required	Not Required
Adjusted on W-4 Form	No	Yes

FICA taxes are not fluctuated by deductions, credits, and W-4 form adjustments. Rather, it is solely based on the wages of the employee. 

What is the Effect of FICA Tax Contributions on Your Retirement?  

Your eligibility and the benefits you receive under Social Security and Medicare depend upon the amount of FICA contributions you have made. 

Each time you pay Social Security tax, you get work credits. By 2025, employees will be able to get up to four credits annually according to their yearly earnings. As a rule, 40 credits are required to receive retirement benefits. 

How benefits are calculated: 

The Social Security Administration (SSA) makes use of: 

• Your top thirty-five years of income. 
• The average indexed monthly earnings (AIME).
• The age at which you are taking benefits. 
• Increased lifetime earnings (to the wage base limit) normally result in increased retirement benefits.

What Impacts Your Monthly Benefits?

• This concession at age 62 decreases benefits. 
• Waiting till full retirement age gives full benefits. 
• Waiting to take payments at 70 years of age would mean higher monthly payments. 
• The spousal and survivor benefits may apply. 

Medicare eligibility also requires adequate FICA payments. The vast majority of people are eligible to receive premium-free Medicare Part A once they have obtained sufficient work credits. 

Wrapping Up!

FICA taxes are not just a payroll deduction; it is used to cover vital social insurance programs that enable one to have financial security upon retirement, disability, or even medical requirements. Employees are required to contribute 7.65% of their earnings, employers equally contribute the same, and taxes under social security are only imposed on earnings of up to $176,100. 

Also Read: UK Tax Year: A Branded Guide to Stay Compliant with Tax Regulations

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