The Federal Insurance Contributions Act (FICA) tax constitutes a mandatory payroll tax that funds Social Security and Medicare programs in the United States. These programs provide financial support to retirees, disabled individuals, and beneficiaries of deceased workers with respect to basic healthcare and wellness needs.
How Does FICA Tax Work?
Employers automatically withhold FICA tax from their employees' paychecks. Employers contribute an equal amount. Legislators divided FICA tax into two main categories:
Social Security Tax:
This portion of FICA tax funds the Social Security program, which includes retirement, disability, and survivor benefits. The current Social Security tax rate is 6.2% for employees and 6.2% for employers, amounting to a total of 12.4%. However, this tax only applies to earnings up to a certain wage cap, which is adjusted annually by the Social Security Administration.
Medicare Tax:
This portion of FICA tax funds Medicare, which is our nation's federal health insurance program designed primarily for individuals aged 65 and older. The Medicare tax rate is 1.45% for employees and 1.45% for employers, amounting to 2.9%. Unlike Social Security tax, there is no wage cap for Medicare tax. Additionally, an extra 0.9% Medicare surtax applies to high-income earners who exceed certain thresholds ($200,000 for single filers and $250,000 for married couples filing jointly).
Who Actually Qualifies for Social Security and Medicare Benefits?
- Retirees: People who have worked and paid Social Security taxes for at least 10 years (40 credits) and reach the eligible retirement age (currently 62 for early benefits, 67 for full benefits for those born in 1960 or later).
- Disabled Individuals: Those who qualify for Social Security Disability Insurance (SSDI) based on work history and a qualifying disability.
- Survivors: Spouses, children, and sometimes parents of deceased workers who earned enough credits.
- Dependents: Spouses and children of retired or disabled workers may receive benefits.
- People 65 and older: If they or their spouse paid Medicare taxes for at least 10 years.
- Younger people with disabilities: If they have been receiving SSDI for at least 24 months.
- People with End-Stage Renal Disease (ESRD) or ALS (Lou Gehrig’s disease): Eligible regardless of age.
Who Pays FICA Tax?
- Employees: Employers deduct FICA tax from their employees' wages before employees collect their paychecks.
- Employers: Employers must match their employees’ FICA contributions.
- Self-Employed Individuals: Those who are self-employed must pay the full 15.3% FICA tax on their own, as they are acting as both the employer and the employee. This is known as the self-employment tax, though self-employed individuals can deduct the employer-equivalent portion when calculating their taxable income. Self-employed individuals may elect to be taxed as an S-Corporation by forming an LLC or corporation, meeting the S Corporation requirements, and using Form 2553, which allows them to be taxed according to subchapter S of Section 1361 of the tax code (being taxed as a small business corporation). This may not always be beneficial depending on the taxpayers business and circumstances. Taxpayers should consult a tax attorney before electing to be taxed as an S Corporation.
Exemptions from FICA Tax
Those who are exempt from FICA tax may include the following:
- Certain religious groups that opt out of Social Security and Medicare benefits.
- Churches and qualified church organizations can elect to be exempt from FICA tax by filing Form 8274
- Some nonresident aliens.
- Students working at the same educational institution they attend under certain conditions.
Is FICA Tax Important?
FICA tax is meant to fund government programs that are positioned to support millions of Americans. By contributing to Social Security and Medicare, the idea is that workers will help ensure financial security and healthcare benefits for current and future retirees, as well as individuals with disabilities and other beneficiaries.
Understanding FICA tax can help employees, employers, and self-employed individuals better prepare for their financial obligations and retirement benefits. While it is an unavoidable payroll tax, it has been put in place to provide long-term benefits that are meant to support the well-being of the nation’s workforce and retirees.
Is Tax ID and EIN the Same Thing?
Not exactly. Tax ID is a broad term that refers to any identification number used for tax purposes, while an EIN (Employer Identification Number) is a specific type of Tax ID issued by the IRS to businesses.
Here’s a breakdown:
- Tax ID (Taxpayer Identification Number, TIN): This is a general term that includes different types of tax identification numbers.
- EIN (Employer Identification Number): A type of Tax ID used by businesses, nonprofit organizations, and other entities for purposes of tax reporting.
- SSN (Social Security Number): A type of Tax ID used by individuals.
- ITIN (Individual Taxpayer Identification Number): A Tax ID for individuals who don’t qualify for an SSN (i.e. resident or non-resident aliens).
So, while an EIN is a Tax ID, not all Tax IDs are EINs.
WHAT IS BACKUP TAX WITHHOLDING?
The IRS uses backup tax withholding to ensure tax collection on certain types of income when a taxpayer fails to provide the correct taxpayer identification number (TIN) or is otherwise not compliant with tax rules. It requires payers, such as banks and other financial institutions, to withhold a percentage of payments (currently 24%) and send it to the IRS on behalf of the payee.
When Does Backup Withholding Apply?
- The taxpayer does not provide a correct TIN (such as a Social Security Number or Employer Identification Number).
- The IRS notifies the payer that the taxpayer is subject to backup withholding due to underreported interest or dividend income.
- The taxpayer fails to certify that they are not subject to backup withholding on Form W-9.
- The taxpayer receives certain types of income subject to backup withholding, such as interest, dividends, rents, royalties, gambling winnings, and certain payments for services.
How to Avoid Backup Withholding
- Provide a correct and valid TIN.
- Ensure tax returns are filed accurately and on time.
- Complete Form W-9 correctly and submit it to payers when requested.
- Resolve any IRS notices regarding underreporting or tax compliance issues.
- See also Rev. Proc. 92-32
If backup withholding has been applied to your income, you may be able to claim it as a credit when filing your tax return to offset any tax liability. Talk to your tax attorney to understand your options.
What is FICA Tax? © 2025 by Michael J Koberlein is licensed under CC BY 4.0 
What Is FICA Tax?