FICA tax need to knows
Find out what FICA tax is, how to calculate it, and the rates for employers, employees, and self-employed professionals in 2023.
If you aren’t sure what FICA is, or whether you’re responsible for paying this tax, keep reading. This article explains the ins and outs of the Federal Insurance Contributions Act and its associated taxes, including current rates and a handy guide for calculating the amount you’ll pay in 2023.
What is FICA tax?
There are a million jargon tax terms out there, and FICA is one of them for many employees and new business owners. The term ‘FICA tax’ comes from the Federal Insurance Contributions Act, or FICA, which mandates that a federal payroll tax be applied to the paychecks of employees in the US.
FICA contributions by employees must be matched by their employers. They’re taken as a percentage of an employee’s gross pay, and employers then have to pass that amount (and their matched contribution) on to the IRS.
The FICA tax encompasses two separate taxes—Social Security and Medicare. Social Security contributions have a wage limit; income above this limit isn’t taxed. There’s no limit to Medicare tax, but earners over a certain threshold must pay some additional Medicare tax that their employer won’t match.
If you’re self-employed, you’ll still need to contribute to Social Security and Medicare, but you’ll do so through self-employment tax, essentially functioning as both the employee and the employer, and paying the total rate.
What is the purpose of FICA tax?
FICA payroll taxes were enacted in 1935 to fund Franklin D. Roosevelt’s Social Security system. They have been collected since 1937. Medicare was added into the mix 30 years later, in 1965. The purpose of FICA comes down to these two programs. Contributions are used:
For Medicare Part A (Medicare Parts B, C, and D are not funded by FICA tax), which:
Subsidizes healthcare for any US citizen older than 65
Subsidizes healthcare for many US citizens with disabilities
Subsidizes healthcare for US citizens with end-stage renal disease
For Social Security, which:
Provides retirement benefits to people in their old age
Provides disability benefits
Provides survivorship benefits
In short, paying FICA tax now, even when you aren’t receiving Social Security or Medicare benefits, can create a safety net that you can utilize if necessary at a different time in your life.
Is FICA tax compulsory?
In almost all cases, yes, the FICA tax is compulsory. It’s not an elective or optional tax, and it’s automatically taken from your paycheck as an employee. There are some exemptions, but most working people in the US will need to pay. Exempt groups include:
Students employed by their school/college/university while studying
Certain international students, teachers and researchers temporarily resident in the US
Foreign government employees working and earning in an official capacity
People who aren’t legal residents of the country or US citizens
Members of certain religious groups who qualify for an exemption (this exemption is not automatic)
How much is FICA tax?
As with any tax, the amount owed is subject to change each year. In 2023, the FICA tax rate is 15.3 per cent in total. To break that down:
The employer FICA rate is 7.65 per cent
The employee FICA tax is 7.65 per cent
The self-employed FICA tax is 15.3 per cent
The Social Security tax rate is 12.4 per cent (out of the 15.3 per cent total)
The Social Security employer rate is 6.2 per cent (out of the 7.65 per cent total)
The Social Security employee tax is 6.2 per cent (out of the 7.65 per cent total)
The Social Security self-employed tax is 12.4 per cent (out of the 15.3 per cent total)
The Medicare tax rate is 2.9 per cent (out of the 15.3 per cent total)
The Medicare employer rate is 1.45 per cent (out of the 7.65 per cent total)
The Medicare employee tax is 1.45 per cent (out of the 7.65 per cent total)
The Medicare self-employed tax is 2.9 per cent (out of the 15.3 per cent total)
Every year, the Social Security Administration (SSA) limits how much of an employee’s wage can be taxed for Social Security. This is called the ‘contribution and benefit base.’ In 2023, that base is $160,200.
Medicare isn’t limited in the same way and will continue to be taxed at 2.9 per cent (1.45 per cent for the employer, 1.45 per cent for the employee) upwards of $160,200. In fact, an additional Medicare tax will also apply above a certain earnings threshold.
If a single filer in 2023 earns over $200,000, they’ll have to pay an additional 0.9 per cent Medicare tax, and their employer won’t match this one. (For married taxpayers filing jointly, the earning threshold for the 0.9 per cent additional tax is $250,000. For married taxpayers filing separately, it’s $125,000.)
How to calculate FICA tax
If you’re wondering how to calculate FICA tax in your financial situation, don’t panic—Unbiased is here to help you make sense of your taxes.
The best way to explain how you can do the math is to use a typical example and work through it from start to finish. So, meet Employee A, who works for Business B. Employee A is on a salary of $50,000. In 2023:
Employee A will be expected to pay 7.65 per cent in FICA tax
Business B will be expected to match this, sending 15.3 per cent in total to the IRS
$50,000 x 0.0765 = $3,825, meaning Employee A’s FICA tax contributions will add up to a total of $3,825
Business B will meet this amount, sending $7,650 in total to the IRS
(Don’t forget that you’ll only be taxed on Social Security up to $160,200 in 2023, and you’ll have to pay an additional 0.9 per cent Medicare tax over a certain earnings threshold.)
In this article, we’ve covered the FICA tax, why it exists, and how much you’re likely to pay in FICA taxes this year. Staying informed on the latest tax rates is essential for your financial literacy and tax planning, whether you’re a self-employed professional, a business owner, or an employee.
For more tax guidance or any other financial advice, why not turn to an Unbiased expert? We’re waiting to lend an ear, so don’t hesitate to find an advisor that suits you.
Kate has written for leading publications and blue chip companies over the last 20 years.