If you have a job, chances are that every time you get paid, you see FICA taxes deducted from your paycheck.
Short for the Federal Insurance Contributions Act, this 15.3% tax (for most workers) is paid half by you, and half by your employer. Started during the Great Depression, the FICA tax is used to fund key parts of the government’s social safety net, namely Social Security and Medicare.
The upshot is that, while no one likes taxes, with FICA you can count on the government paying back your contributions in the form of retirement and healthcare benefits.
Here’s what you need to know about FICA taxes, the two taxes it includes and what the 2023 changes to Social Security tax calculations mean for your paycheck.
What is FICA tax?
FICA tax is a payroll tax imposed by the federal government that funds Social Security and Medicare programs.
Part of President Franklin Roosevelt’s New Deal, the government started collecting FICA taxes in 1937, following the passage of the Federal Insurance Contributions Act of 1935. With millions of people out of work, the idea was to provide pensions for elderly workers.
At first, Social Security was a self-funded program where workers’ present contributions funded their future benefits. As the program grew and added benefits for surviving spouses, disabled persons and federal employees, however, the funding method changed.
Today, money collected from FICA tax funds Social Security and Medicare benefits for current retirees, disabled persons and qualifying surviving spouses. The Medicare tax was added to FICA tax in 1965 after Congress passed the Medicare and Medicaid Act that same year.
So if you’re a future retiree, you can think of FICA tax as one that will, eventually, pay you back. That is, providing that the Social Security program can remain funded through payroll taxes.
How do FICA taxes work?
FICA tax is a 15.3% tax that’s actually a combination of two taxes: Social Security (12.4%) and Medicare (2.9%). You and your employer split these taxes fifty-fifty, each paying 7.65% of your pretax wages as tax each payday. Your employee portion gets deducted from your paycheck, but your employer sends their portion straight to the federal government.
If you’re having trouble finding the Social Security tax deduction on your pay stub, don’t worry. Some payroll providers call this tax OASDI, which stands for old age, survivors and disability insurance. Rest assured, it and the Social Security tax are the same.
How are FICA taxes calculated?
There’s no one formula for calculating FICA taxes. Instead, Medicare and Social Security each have a unique formula for calculating what you owe.
Medicare taxes
Medicare tax calculations are straightforward: You pay 2.9% on all income earned, split 50/50 with your employer. If you earn more than $200,000, or $250,000 for joint filers, you’re also subject to a 0.9% surtax, which isn’t split with your employer.
Here’s how that looks for single filers:
- Earnings up to $199,999: You and your employer each pay 1.45%
- Earnings $200,000 and above: Your employer pays 1.45%; you pay 2.35%
Social Security taxes
To calculate your Social Security tax, the government uses a wage base, which sets a limit on how much of your income is subject to Social Security taxes. For example, the Social Security wage base was $147,000 in 2022. Therefore you’d only pay Social Security taxes on the first $147,000 earned that year.But the wage base can change. So when rising wages prompted the Social Security Administration to increase Social Security benefits for 2023, they also raised the Social Security tax wage base. For 2023, the new wage base is $160,200—a $13,200 increase and the largest wage base hike in history.
2023 FICA Tax Limits and Rates
You and your employer will pay a combined total of 15.3% on your first $160,200 earned
| Rate you and employer each pay | |
|---|---|
| Social Security tax (OASDI) | 6.20% |
| Medicare Tax | 1.45% |
| Total FICA tax on first $160,200 earned | 7.65% |
Those earning more than $200,000, or $250,000 for joint filers, also pay an extra 0.9% Medicare tax on their entire incomes.
Source: IRS
Here’s how the increased Social Security wage base works out for high earners in 2023—who can expect to pay $818 more in Social Security taxes than in 2022.
The Social Security Wage Base Increased for 2023
Raising the wage base to $160,200 from $147,000 could add hundreds to your tax bill
| FICA tax | If you earned $160,200 in 2022 | If you earned $160,200 in 2023 |
|---|---|---|
| Your Social Security tax is... | $9,114 | $9,932 |
| Your Medicare Tax tax is... | $2,320 | $2,320 |
Source: IRS
Who pays FICA tax and why?
If you have earned income—which includes wages from an employer or self-employment—you’re likely subject to FICA tax.
If you receive a paycheck, FICA taxes are automatically deducted from your wages, with you and your employer splitting the tax burden. The self-employed, however, pay a federal self-employment tax totaling 15.3%, as they’re both the employee and employer.
Yet some individuals won’t pay the Social Security portion of FICA tax, though the exemptions are few. Qualifying individuals, according to the IRS’s terminology, could include:
- “Nonresident aliens”
- Members of specific religious organizations
- Students who work at the school where they’re currently enrolled
- Some employees of foreign governments.
Each exemption has criteria that individuals must meet, and those taking an exemption are ineligible to receive Social Security benefits.
FICA vs. federal income tax
While FICA and federal income tax are both deductions from your wages, they’re separate taxes that fund different government activities.
FICA tax funds Social Security Trust Funds and the Medicare Hospital Insurance Trust Fund, respectively, and pays for benefits related to those government programs.
Federal income taxes fund programs, goods and services for the public benefit like national parks, highways and more. Income taxes also pay interest on debt held by the U.S. government.
These taxes share one similarity: The IRS receives both, then doles out the tax revenue to the appropriate programs.
As a seasoned financial expert with a deep understanding of taxation and government funding mechanisms, let me delve into the intricacies of the article on FICA taxes, shedding light on each concept and providing comprehensive insights.
Introduction to FICA Tax: The Federal Insurance Contributions Act (FICA) tax is a fundamental component of the U.S. payroll tax system, playing a pivotal role in financing key social safety net programs such as Social Security and Medicare. Instituted during the Great Depression as part of President Franklin Roosevelt's New Deal in 1935, the FICA tax has undergone modifications over the years to adapt to changing economic and social landscapes.
Historical Context and Evolution: FICA taxes originated in response to the economic challenges of the 1930s, aiming to establish pensions for elderly workers. Originally a self-funded program, Social Security has expanded to cover various benefits, including those for surviving spouses, disabled individuals, and federal employees. The addition of the Medicare tax in 1965 further broadened FICA's scope.
Components of FICA Tax: The FICA tax is a combination of two distinct levies: Social Security tax and Medicare tax. The total rate stands at 15.3%, with individuals and employers each contributing 7.65% of the employee's pre-tax wages. This dual structure ensures that both employers and employees share the financial burden, reinforcing the social security and healthcare safety nets.
Calculation of FICA Taxes: Breaking down the FICA tax, the Social Security component is 12.4%, and the Medicare component is 2.9%. Notably, there is an additional 0.9% Medicare surtax for individuals earning more than $200,000 (or $250,000 for joint filers). The Social Security tax is calculated based on a wage base, setting a limit on the income subject to this tax. The 2023 adjustment raises the Social Security wage base to $160,200, marking the largest increase in history.
Impact on High Earners: The increased wage base has financial implications, as demonstrated by a comparison between 2022 and 2023 scenarios. High earners can expect to pay more in Social Security taxes due to this adjustment, with specific figures illustrating the potential impact on an individual's tax bill.
Eligibility and Exemptions: FICA taxes are applicable to individuals with earned income, encompassing wages from employment or self-employment. While most individuals are subject to FICA tax, there are exemptions, such as nonresident aliens, certain religious organization members, students working at their enrolled schools, and some employees of foreign governments. Meeting specific criteria is essential for claiming these exemptions, but individuals who qualify are ineligible to receive Social Security benefits.
Comparison with Federal Income Tax: It's crucial to distinguish between FICA tax and federal income tax. FICA tax directly funds Social Security Trust Funds and the Medicare Hospital Insurance Trust Fund, supporting benefits related to these programs. In contrast, federal income taxes contribute to a broader spectrum of government activities, including national parks, highways, and interest payments on U.S. government debt.
In summary, a comprehensive understanding of FICA taxes involves grasping its historical origins, dual-component structure, intricate calculations, impact on different income brackets, eligibility criteria, and differentiation from federal income tax. This knowledge empowers individuals to navigate the complexities of payroll deductions and comprehend the broader implications for social safety nets and public services.
