FICA taxes fund two federal insurance programs: Social Security and Medicare

When you see "FICA" deducted from your paycheck, that money goes into two separate trust funds run by the federal government. Half of your FICA payment funds Social Security, which pays retirement benefits, disability benefits, and survivor benefits to workers and their families. The other half funds Medicare, which pays for hospital insurance, medical insurance, and prescription drug coverage for people age 65 and older, plus some younger people with disabilities or end-stage renal disease.

The money does not sit in an account with your name on it. Instead, current FICA taxes pay current beneficiaries. When you retire or become disabled, future workers' FICA taxes will pay your benefits. This is called a "pay-as-you-go" system, and it has operated this way since Social Security began in 1935 and Medicare began in 1965.

Key Takeaways

  • Social Security receives 12.4% of your wages (split between you and your employer), and Medicare receives 2.9% (also split), for a total FICA rate of 15.3%.
  • Social Security benefits include retirement payments starting at age 62, disability payments for workers who cannot work, and survivor payments to family members of deceased workers.
  • Medicare Part A covers hospital stays and skilled nursing care, Part B covers doctor visits and outpatient services, and Part D covers prescription drugs.
  • FICA taxes are mandatory for almost all workers in the United States, including self-employed people who pay both the employee and employer share.

How Social Security uses your FICA contribution

The Social Security portion of FICA (12.4% of wages) funds three types of benefits. Retirement benefits are the most common: workers who have paid into Social Security for at least 10 years can claim a monthly payment starting as early as age 62, though the payment is larger if you wait until your full retirement age (between 66 and 67 for most people born after 1954) or until age 70. The amount you receive depends on your earnings history, not on how much you paid in total.

Disability benefits go to workers under full retirement age who have a medical condition expected to last at least 12 months or result in death, and who have worked long enough to be insured. You do not have to be retired to receive them. Family members of a disabled worker — a spouse, ex-spouse, or child under 19 (or 23 if in school) — may also receive benefits based on that worker's record.

Survivor benefits pay the family members of a worker who dies, regardless of age. A widow or widower can receive benefits at age 60 (or 50 if disabled), a spouse caring for a child under 16 can receive benefits at any age, and unmarried children under 19 (or 23 if in school) receive benefits. These payments come from the same Social Security trust fund as retirement and disability.

How Medicare uses your FICA contribution

The Medicare portion of FICA (2.9% of wages) funds Part A, which covers inpatient hospital care, skilled nursing facility care, hospice care, and some home health services. Part A is automatic for people age 65 and older who have paid Medicare taxes for at least 10 years (or whose spouse has). You pay no monthly premium for Part A, though you do pay a deductible when you use it.

Part B, which covers doctor visits, outpatient surgery, lab tests, and other medical services, is also funded partly by FICA taxes, though enrollees pay a monthly premium ($164.90 in 2024, though this changes yearly). Part D, which covers prescription drugs, is funded through a combination of FICA taxes and general tax revenue, and enrollees choose a plan and pay a monthly premium.

Medicare is available to people age 65 and older, people under 65 with certain disabilities, and people with end-stage renal disease or ALS. You do not have to be retired to use Medicare; you become may be able to access based on age or medical condition, regardless of work status.

Why FICA taxes are mandatory and how much you pay

FICA taxes are mandatory for nearly all workers in the United States. Your employer withholds 7.65% from your paycheck (6.2% for Social Security, 1.45% for Medicare), and your employer pays an equal 7.65% on your behalf, for a total of 15.3%. If you are self-employed, you pay both the employee and employer share, which totals 15.3% of your net self-employment income.

There is a wage cap on Social Security taxes: in 2024, you pay Social Security tax only on the first $168,600 of wages. Once you earn above that amount in a year, your employer stops withholding Social Security tax from your paycheck (though Medicare tax continues on all wages with no cap). This means higher earners pay a smaller percentage of their total income into Social Security.

Medicare tax has no wage cap. You pay 1.45% on all wages, and if you earn more than $200,000 as a single filer (or $250,000 married filing jointly), you pay an additional 0.9% Medicare tax on the amount above that threshold. This additional tax was added in 2013 to help fund the Affordable Care Act.

What happens to FICA taxes after they are collected

The U.S. Treasury collects FICA taxes from employers and workers throughout the year. The Social Security Administration and Centers for Medicare and Medicaid Services (CMS) use these funds to pay current beneficiaries. Each program maintains a trust fund — the Social Security trust fund and the Medicare trust fund — that holds reserves.

When FICA tax revenue exceeds what the program pays out in benefits, the surplus goes into the trust fund. When benefit payments exceed tax revenue (which has been happening with Social Security since 2021), the program draws down the trust fund. If a trust fund is depleted, the program can only pay benefits from incoming tax revenue, which would mean a reduction in payments to all beneficiaries unless Congress acts.

The Social Security Administration publishes an annual report on the trust fund's status. The most recent report projects that the Social Security trust fund will be depleted around 2034 if no changes are made to the program. Medicare's Hospital Insurance trust fund (Part A) faces a similar timeline. These projections are based on demographic trends, wage growth, and current law, and they change year to year.

The difference between FICA taxes and income tax

FICA taxes and federal income tax are separate deductions on your paycheck, and they fund different things. FICA taxes fund Social Security and Medicare, which are insurance programs you pay into during your working years. Federal income tax funds general government operations — defense, infrastructure, federal employee salaries, and thousands of other programs.

FICA taxes are also regressive, meaning they take a larger percentage of income from lower-wage workers than from higher-wage workers (because of the Social Security wage cap). Income tax is progressive, meaning the tax rate increases as income increases. A worker earning $40,000 per year pays 15.3% of their income in FICA taxes, while a worker earning $400,000 pays a much smaller percentage because Social Security tax stops at $168,600.

Frequently Asked Questions

Can I get my FICA taxes back if I don't work long enough to receive benefits?

For Social Security, you must have worked and paid FICA taxes for at least 10 years (40 quarters) to be insured for retirement or disability benefits. If you do not reach 40 quarters, you cannot receive benefits based on your own record, and you cannot get a refund of the taxes you paid. However, family members may still be able to receive survivor benefits if you die.

Do I pay FICA taxes on all my income?

No. FICA taxes apply only to wages and self-employment income. Income from investments, rental property, or capital gains is not subject to FICA tax. Additionally, certain types of workers are exempt from FICA taxes, including some government employees, religious workers, and students working for their school. Check with your employer or a tax professional if you are unsure whether your income is subject to FICA.

What if I work in another country — do those taxes count toward Social Security?

Generally, work in another country does not count toward Social Security unless that country has a totalization agreement with the United States. These agreements allow workers to combine credits earned in both countries. The Social Security Administration maintains a list of countries with totalization agreements. If you have worked abroad, contact Social Security to ask whether your foreign work credits can be counted.

Does FICA tax money ever go to anything other than Social Security and Medicare?

No. By law, FICA taxes can only fund Social Security and Medicare. Congress cannot redirect FICA revenue to other programs. However, the federal government does borrow money from the Social Security trust fund in some cases, which must be repaid with interest. This is separate from the FICA taxes themselves.