What Is the FICA Tax?

FICA Tax Explained

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If you’re an employee on a U.S. payroll, one of the taxes you’ll see subtracted from your gross pay will be the Federal Insurance Contributions Act tax (FICA), which is a combination of Social Security and Medicare taxes. 

Learn what FICA is, why you have to pay it, and the differences between FICA and income taxes. 

Definition and Example of the FICA Tax

The FICA tax, also commonly called payroll or withholding tax, is money collected from you and your employer to pay for services such as old-age, survivors, and disability insurances (OASDI). It also covers Medicare. 

  • Alternate name: Withholding or payroll tax
  • Acronym: FICA

As an employee, your total amount of FICA tax due for 2021 is 6.2% of your gross wages for Social Security and 1.45% of your gross wages for Medicare, for a total of 7.65%. 

While Social Security taxes have a cap based on your earnings—$142,800 for 2021—Medicare tax is actually increased by 0.9% if you earn more than a certain amount in a calendar year. For single filers, that threshold is $200,000; for those who are married and filing jointly, the threshold is $250,000.

Your employer will automatically withhold these taxes for you. It will also match your contributions to the FICA tax, which results in a total of 15.3% in FICA tax paid per employee each year. 

While independent contractors are not subject to FICA tax, they are on the hook for self-employment tax, which is similar to the FICA tax in that it covers Social Security and Medicare taxes. The total tax due from independent contractors is a full 15.3% each year.  

The total amount of tax due for all workers is 15.3% of gross earnings for 2020, though most people will see only 7.65% of that deducted from their checks because their employer pays the rest. 

How Does the FICA Tax Work?

Driven by the suffering of the Great Depression, the FICA tax was originally created to fund an “old age” Social Security system. Signed into law by Franklin Roosevelt in 1935, its intent was to create a self-funding program rather than one reliant on federal revenue. When Medicare was created in 1965, this was also added to the tax. 

Do You Have To Pay FICA Tax?

As an employee in the United States, you are most likely subject to the FICA tax. While there are a few exemptions, such as certain religious figures or groups, most employees must pay into the system. 

FICA is a nonelective tax that is withheld automatically from your paycheck throughout the year, so you’ll never have to worry about it when tax returns are due.  

FICA Tax vs. Income Tax

Understanding the different types of tax can be confusing, especially because the United States has so many different kinds. So, what’s the difference between FICA and income tax, and how does it affect you?

To put it simply: Almost everybody pays the FICA tax; whether you owe income tax, meanwhile, varies depending on your income.

FICA Tax Income Tax (Federal or State) 
Levied to fund Social Security and Medicare programs Used to create general revenue for the federal (or state) budget
Social Security tax is capped based on how much you earn; Medicare tax isn’t Tax brackets determine how much tax you owe each year
Automatically withheld from your paycheck You can opt to increase/decrease your exemptions, but you may be liable for taxes or penalties on your annual tax return 

Pros and Cons of FICA Taxes

  • Funds services you’ll likely need someday

  • Worry-free tax that’s collected automatically from your paycheck

  • Mandatory tax 

  • No cap on taxed earnings

Pros Explained:

  • Funds services you’ll likely need someday: Nearly everyone will need to rely on Social Security services someday—whether you’re suffering from a disability or simply elderly. You’re paying to fund benefits you’ll likely later use. 
  • Worry-free tax that’s collected automatically from your paycheck: Unlike federal or state taxes, the FICA tax is automatically withheld from your pay, so you don’t ever need to worry about it.

Cons Explained

  • Mandatory tax: With very rare exceptions, this tax is mandatory for U.S. employees, whether you use its services or not. 
  • No cap on taxed earnings: While the Social Security portion of the FICA tax caps out each year, the Medicare portion doesn’t. You’re also assessed an additional 0.9% Medicare tax for wages over $200,000 as a single tax filer (and wages over $250,000 for married taxpayers filing jointly).

Key Takeaways

  • The FICA tax directly funds Social Security and Medicare benefits. 
  • FICA tax is mandatory for nearly all U.S. employees.
  • The current FICA tax rate is 15.3%, which the is the total of 7.65% of your income paid by you and 7.65% paid by your employer.

Article Sources

  1. Internal Revenue Service. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed Dec. 16, 2021.

  2. Social Security Administration. "What Is FICA?" Accessed Dec. 16, 2021.

  3. Internal Revenue Service. "Questions and Answers for the Additional Medicare Tax." Accessed Dec. 16, 2021.

  4. Internal Revenue Service. "Independent Contractor Defined." Accessed Dec. 16, 2021.

  5. Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed Dec. 16, 2021.

  6. Edward Berkowitz. "Medicare and Medicaid: The Past as Prologue." Health Care Financing Review. Accessed Dec. 16, 2021.