FICA

Key Takeaways

• FICA taxes fund Social Security and Medicare programs that provide retirement income, disability benefits, and healthcare coverage for eligible Americans
• The 2025 Social Security tax rate is 6.2% for employees and 6.2% for employers (12.4% total), applied to wages up to $176,100
• Medicare tax is 1.45% for employees and 1.45% for employers (2.9% total), with no wage limit
• An additional Medicare tax of 0.9% applies to wages exceeding $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately
• Self-employed individuals pay both portions of FICA taxes (12.4% Social Security plus 2.9% Medicare) but can deduct the employer-equivalent portion
• Social Security wage base adjusts annually based on national average wage index, increasing from $168,600 in 2024 to $176,100 in 2025
• FICA reduces net pay by 7.65% for most employees (6.2% Social Security plus 1.45% Medicare) before additional Medicare tax thresholds
• Combined Social Security trust funds are projected to be depleted by 2034 according to the 2025 Trustees Report, potentially requiring legislative changes

What Is the Federal Insurance Contributions Act (FICA)?

The Federal Insurance Contributions Act of 1935, also known as FICA, is a piece of legislation that imposes a tax on wage earners and employers to support retirees. The reach of FICA was extended in 1954 under the Self-Employment Contributions Act, which required self-employed individuals to also contribute a portion of their earnings.

FICA has two components: Social Security and Medicare. Social Security tax, also known as the FICA OASDI tax, goes towards providing monthly cash benefits for retirees, the disabled, and certain survivors, while Medicare provides healthcare benefits for individuals over the age of 65 and those with qualifying disabilities.

FICA operates on a pay-as-you-go system where current workers' taxes fund current beneficiaries' payments rather than accumulating in individual accounts. Workers earn credits toward their own future benefits through years of covered employment, with benefit amounts based on lifetime earnings history. This intergenerational funding structure distinguishes Social Security and Medicare from private retirement accounts or insurance policies.

FICA Rates for 2025

The FICA rates remain unchanged from year to year; however, the wage base that the tax is imposed on is adjusted for inflation. Social Security is a 6.2% tax that both employees (or self-employed individuals) and employers pay. For the 2025 tax year, Social Security tax is assessed up to $176,100. Social Security tax only applies to wages up to this limit, meaning earnings above $176,100 are not subject to Social Security tax.

Medicare is taxed at 1.45% for both employees (or self-employed individuals) and employers, with no wage base limit—all wages are subject to this tax. An additional Medicare tax of 0.9% goes into effect once wages exceed $200,000 for single taxpayers, $250,000 for married filing joint taxpayers, and $125,000 for married filing separately taxpayers. Employers withhold this additional tax once an employee's wages exceed $200,000 in a calendar year, regardless of filing status. Employees who underpay additional Medicare tax through withholding may owe the difference when filing tax returns.

How FICA Affects Paychecks

FICA reduces the net pay employees receive from paychecks each pay period. For an employee who earned $1,000 in gross wages during a pay period and remains under the Social Security wage base and additional Medicare thresholds, FICA taxes would be calculated as follows:

Social Security Tax = $1,000 x 6.2% = $62.00

Medicare Tax = $1,000 x 1.45% = $14.50

Gross pay of $1,000 would be reduced by $76.50 in FICA taxes, resulting in $923.50 before other deductions. Federal and state income tax withholding commonly reduces paychecks further beyond FICA.

Once an employee's year-to-date wages exceed $176,100 in 2025, Social Security tax withholding stops for the remainder of the year, though Medicare tax continues on all earnings. High earners may notice this change in their paychecks, typically later in the year for those with consistent high salaries or mid-year for those receiving large bonuses or irregular compensation.

How FICA Impacts Self-Employed Earnings

Self-employed individuals pay both halves of FICA taxes—12.4% for Social Security (6.2% + 6.2%) and 2.9% for Medicare (1.45% + 1.45%)—since they are considered both employer and employee. However, self-employed individuals can claim a deduction for one-half of self-employment tax, which reduces adjusted gross income for income tax purposes. The tax base for FICA taxes is net earnings from self-employment, which is revenue minus all expenses.

The IRS calculates self-employment taxes on 92.35% of net earnings. This percentage is found by subtracting the employee's share (6.2% Social Security tax plus 1.45% Medicare tax equals 7.65%) from 100%.

For net self-employment earnings of $1,000, the calculation would be:

Taxable Earnings = $1,000 x 92.35% = $923.50

Self-Employment Tax = $923.50 x 15.3% = $141.30

Self-employed individuals could then deduct $70.65 (one-half of the self-employment tax) when calculating adjusted gross income for income tax purposes. This deduction reduces income tax liability but not self-employment tax itself. Self-employed individuals typically pay estimated quarterly taxes to cover both self-employment tax and income tax obligations.

The Future of Social Security Funding

Due to the growing number of retirees and individuals claiming Social Security benefits, the Social Security Trust Fund combined reserves are projected to be depleted by 2034 according to the 2025 Trustees Report released in June 2025. There have been numerous changes discussed to FICA, including raising the retirement age, lowering benefits, and increasing the payroll tax rates, but no firm legislation has been enacted. After 2034, if no legislative changes occur, Social Security could pay approximately 81% of scheduled benefits using ongoing payroll tax revenue. Various proposals have been discussed in policy literature to address this projected shortfall, though the timing and structure of any potential changes remain subject to legislative action.

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