FICA taxes are the Social Security and Medicare deductions on your paycheck

FICA stands for the Federal Insurance Contributions Act. It is the law that requires you and your employer to pay taxes that fund two programs: Social Security and Medicare. These taxes come out of your paycheck automatically — you will see them listed as separate line items if you look at your pay stub. The money does not go into a personal account with your name on it. Instead, it goes into a shared federal fund that pays benefits to people who are currently retired, disabled, or receiving Medicare.

FICA is different from income tax, though both come out of your paycheck. Income tax goes to the general U.S. Treasury and funds things like defense, roads, and government operations. FICA taxes fund only Social Security and Medicare. Your employer matches what you pay — meaning if you contribute $100, your employer contributes $100 as well — though you only see your half on your paycheck.

Key Takeaways

  • FICA taxes fund Social Security retirement benefits and Medicare health insurance, not general government spending.
  • Your FICA tax rate is 15.3 percent of your wages split between you and your employer, with you paying 7.65 percent and your employer paying 7.65 percent.
  • Social Security tax has a wage cap — you stop paying it once you earn above a certain amount each year — but Medicare tax does not.
  • Self-employed people pay both the employee and employer portions of FICA, totaling 15.3 percent of their net earnings.

How much FICA tax you pay

FICA is split into two parts: Social Security tax and Medicare tax. Social Security tax is 6.2 percent of your wages, and Medicare tax is 1.45 percent of your wages. That adds up to 7.65 percent total that comes out of your paycheck. Your employer pays another 7.65 percent on top of what you earn, though that amount does not show up on your paycheck — it is a separate cost to them.

There is a catch with Social Security tax: it only applies to wages up to a certain amount each year. That amount changes annually and is called the wage base. Once you earn above that limit, you stop paying Social Security tax for the rest of the year. Medicare tax, however, has no wage cap — you pay 1.45 percent on all your earnings no matter how much you make. High earners also pay an additional 0.9 percent Medicare tax on wages above a certain threshold, which is a separate tax that started in 2013.

Where Social Security tax money goes

The Social Security tax you pay funds benefits for three groups of people: retirees who have reached their full retirement age, workers who become disabled before retirement age, and surviving family members of workers who have died. When you turn 62, you become may be able to access to claim Social Security retirement benefits, though the amount you receive depends on how much you earned during your working years and when you claim.

Social Security is not a savings account. The taxes you pay today do not sit in a fund waiting for you to retire. Instead, current Social Security taxes pay current benefits. The system works on a pay-as-you-go basis: working people's taxes fund today's retirees, and when you retire, future workers' taxes will fund your benefits. This is why the program is sometimes called an intergenerational transfer — money moves from one generation to the next.

Where Medicare tax money goes

Medicare tax funds health insurance for people age 65 and older, regardless of income. It also covers some younger people with disabilities and people with end-stage renal disease. Medicare has four parts: Part A covers hospital stays, Part B covers doctor visits and outpatient care, Part D covers prescription drugs, and Part C is an alternative private insurance option. The Medicare tax you pay during your working years helps fund these services when you and others become may be able to access.

Like Social Security, Medicare operates on a pay-as-you-go system. Your Medicare taxes today pay for current beneficiaries' medical care. When you turn 65, you become may be able to access for Medicare, and you will receive benefits funded partly by taxes from people still working. You will also pay premiums for Medicare coverage when you enroll, which is a separate cost from the FICA tax that came out of your paycheck.

FICA taxes if you are self-employed

If you are self-employed, you pay both the employee and employer portions of FICA taxes yourself. That means you pay 15.3 percent of your net self-employment income toward FICA, compared to the 7.65 percent that a regular employee pays. You calculate this on Schedule SE of your tax return, and the amount becomes part of what you owe when you file taxes each year.

Self-employed people do get one break: you can deduct half of your self-employment tax as a business expense on your tax return. This reduces your taxable income slightly, which lowers your income tax bill. You still pay the full 15.3 percent FICA tax, but the deduction helps offset some of the burden of paying both portions yourself.

How FICA taxes appear on your pay stub

When you look at your pay stub, you will see several deductions listed. The line for Social Security tax is often labeled "OASDI" (Old-Age, Survivors, and Disability Insurance) or simply "Social Security." The Medicare line is usually labeled "Medicare" or "HI" (Hospital Insurance). Both are listed as deductions from your gross pay, meaning they reduce the amount of money you take home.

Your employer also pays FICA taxes on your behalf, but those do not appear on your pay stub because they are not deducted from your wages. If you want to see what your employer pays, you can look at your W-2 form at the end of the year — it shows both the employee and employer portions of FICA taxes paid on your behalf. Understanding these line items helps you see exactly where your paycheck money goes and why your take-home pay is less than your gross salary.

Frequently Asked Questions

Can I opt out of paying FICA taxes?

No. FICA taxes are mandatory for all employees and self-employed people. The only exception is certain religious groups that have received a formal exemption from the federal government, which is rare and requires a specific application process. For most workers, FICA taxes are non-negotiable.

What happens to FICA taxes if I change jobs?

Your FICA taxes continue to be deducted from each paycheck at each job. If you work multiple jobs in the same year, you may pay more Social Security tax than necessary because each employer deducts it separately. You can claim a credit for the overpayment when you file your tax return, and the IRS will refund the excess.

Do FICA taxes count toward my income tax?

No. FICA taxes and income tax are separate. FICA taxes fund Social Security and Medicare only. Income tax funds general government operations. Both are deducted from your paycheck, but they go to different places and fund different programs.

What if I did not pay FICA taxes for some years?

Those years count as zero-earnings years in your Social Security record. Your benefit amount is based on your 35 highest-earning years, so years with no earnings lower your average. You can view your Social Security record online through your account at ssa.gov to see what earnings have been credited to you.