FICA Tax: What It Is and How It Impacts Your Payroll

Published Friday 20 March 2026

Table of contents

• What does FICA stand for?
• How FICA appears on an employee's pay stub
• FICA rates and wage caps
• Employer and employee contributions
• What is FICA tax for small business owners?
• FICA exemptions and special cases
• How FICA affects Social Security and Medicare eligibility
• Manage FICA taxes with Xero
• FAQs on FICA taxes

Key takeaways

• Calculate FICA taxes at 7.65% for both employees and employers (6.2% for Social Security up to $176,100 wage cap, plus 1.45% for Medicare on all wages) to ensure accurate payroll withholding and matching contributions.
• Recognize that self-employed individuals must pay the full 15.3% FICA tax rate covering both employee and employer portions, but can deduct half of this amount (the employer portion) on their income tax return to reduce overall tax burden.
• Implement proper FICA withholding for all employee compensation including wages, bonuses, commissions, and tips, while understanding that failure to withhold can result in IRS penalties equal to 100% of unpaid taxes.
• Apply for FICA exemptions only when employees qualify under specific categories such as certain religious groups, students working at their enrolled school, or children under 18 working for their parents' business.

What does FICA stand for?

FICA is a payroll tax that funds Social Security and Medicare programs. FICA stands for the Federal Insurance Contributions Act of 1935.

Here's how FICA works:

• Employees: Pay 7.65% of wages through payroll withholding
• Employers: Match employee contributions with an additional 7.65%
• Self-employed: Pay the full 15.3% (both employee and employer portions), which the IRS confirms consists of two parts (12.4% for Social Security and 2.9% for Medicare)

Your payroll tax returns show how much was due based on wages paid.

How FICA appears on an employee's pay stub

FICA taxes appear as two separate line items on employee pay stubs: Social Security tax and Medicare tax. These deductions are automatically calculated and withheld from gross pay.

Pay stub example for $1,000 gross pay:

• Gross pay: $1,000.00
• Social Security tax (6.2%): $62.00
• Medicare tax (1.45%): $14.50
• Federal income tax: $100.00
• State income tax: $50.00
• Net pay: $773.50

The Social Security tax applies at a rate of 6.2%, while Medicare taxes are 1.45%. Most payroll software doesn't put these percentages on the pay stub; instead, it just shows the amount withheld from the employee's pay.

The amounts withheld for federal income tax vary according to the details an employee gives the IRS on their W-4 form. If you live in a state with income tax, the employer will also withhold state income tax, using the info from the W-4 (or a similar state form).

As an employer, you also need to:

• match the Social Security and Medicare payments withheld from employees' pay at a combined rate of 7.65% (this does not appear on most pay stubs)
• pay unemployment tax on the federal and state level; although these taxes are based on employee pay, they do not appear on pay stubs

There's a lot to track if you're an employer, and Xero can help you do payroll correctly.

FICA rates and wage caps

FICA tax rates for 2026:

For employees and employers (each):

• Social Security: 6.2% on wages up to $176,100
• Medicare: 1.45% on all wages
• Total: 7.65% each

For self-employed individuals:

• Total FICA tax: 15.3% (covers both employee and employer portions)

Social Security taxes

Social Security tax is 6.2% for wages up to $176,100, as of 2025. Social Security tax only applies to wages up to $176,100. This means the maximum Social Security tax for individuals is $10,918.20 as of 2025. The cap increases annually with inflation.

Medicare portion of FICA taxes

Medicare tax is 1.45% of earned income. Unlike Social Security, there's no wage base limit for Medicare, so it applies to all income, according to the IRS.

Additional Medicare tax for high earners

High earners may be liable for an additional 0.9% Medicare tax if their income exceeds certain thresholds, bringing the total Medicare tax on these wages to 2.35%. The tax thresholds are:

• $250,000 for married filing jointly – regardless of which spouse earned the income
• $125,000 for married filing separately
• $200,000 for all other taxpayers, including single people, head of household, and qualifying widow(er)

Employer and employee contributions

Employers have two FICA tax responsibilities: withhold taxes from employee paychecks and contribute an equal matching amount.

Example calculation for $50,000 annual salary:

• Employee contribution: $50,000 × 7.65% = $3,825
• Employer matching contribution: $50,000 × 7.65% = $3,825
• Total FICA taxes paid: $7,650

The employer doesn't have to match the additional Medicare tax in situations where that applies.

What is FICA tax for small business owners?

Self-employed business owners pay both sides of FICA taxes – the employee portion (7.65%) and the employer portion (7.65%) for a total of 15.3%.

Key benefit: You can deduct half of your self-employment tax (the employer portion) on your income tax return, reducing your overall tax burden.

Self-employment taxes include both the employee and the employer portion of FICA taxes. The Self-Employed Contributions Act (SECA) of 1954 requires self-employed people to make contributions to Medicare and Social Security, helping to ensure that business owners can access these programs as needed.

If you run a sole prop, a partnership, or an unincorporated LLC, you face self-employment taxes on your business's profits. The IRS requires you to pay this tax if your net earnings from self-employment are $400 or more.

S-corps and corporations work differently – if you work in the company, the business pays you the same way as any other employee. The business withholds FICA taxes from your wages, remits them to the IRS, and then makes a matching payment. Any profits you earn from the business aren't subject to FICA taxes, just income tax – these earnings are considered to be investment income, not wages.

Deducting the employer portion

To help offset the extra tax due, self-employed taxpayers get to claim a FICA deduction equivalent to the employer portion of the FICA taxes.

For example:

• The taxpayer has $70,000 in self-employment income (profit after expenses deducted), they owe $10,710 in self-employment tax. They therefore get a SE tax deduction of $5,355, reducing their taxable income to $64,645.
• They then get to deduct a standard or itemized deduction, as well as any other deductions they may qualify for, to reduce their taxable income further.

Again, note that it works differently for S-corps and C-corps. These businesses claim a deduction for the employer match on their corporate income tax returns.

FICA exemptions and special cases

FICA tax exemptions apply to specific groups and situations. Most workers pay FICA taxes, but these categories may qualify for exemptions:

Religious exemptions:

• Amish and Mennonite workers: Can apply for exemption but forfeit Social Security and Medicare benefits
• Church employees: Generally exempt from employer FICA taxes

Student and family exemptions:

• Students working at their school: Wages typically exempt from FICA
• Children under 18 working for parents: Exempt from both employee and employer portions

Churches and qualified church-controlled organizations

Employers in these organizations are generally exempt from FICA taxes. Employees, however, still owe self-employment tax on wages over $108.28.

Certain religious groups

Members of recognized faiths such as the Amish or Mennonites can apply for a FICA exemption. This exemption is available to those with conscientious objections to social security insurance who file Form 4029 for IRS approval. These employees cannot receive Medicare or Social Security benefits. If they work for an employer outside their religious community, they are still subject to FICA taxes.

Students working for their school

If a student is employed by the same educational institution where they are enrolled, their wages are usually exempt from FICA taxes, as the IRS provides student FICA exception guidelines for schools.

Minors employed by parents

Wages paid to a minor child by a parent's business are exempt from both the employee and employer portions of FICA.

Certain foreign workers (visa holders)

Some visa holders may qualify for exemptions, including:

• A-visas: Foreign government employees and their families
• D-visas: Crew members of foreign ships or aircraft with foreign employers performing services outside the U.S.
• G-visas: Employees of international organizations
• H-visas: Temporary agricultural workers in the U.S. and certain Philippine residents working in Guam
• F, J, M, or Q visas: Students, teachers, and researchers

How FICA affects Social Security and Medicare eligibility

FICA taxes directly fund your future Social Security and Medicare benefits. The more you pay in FICA taxes, the higher your potential benefits.

Social Security qualification requirements:

• Minimum credits needed: 40 credits (10 years of work)
• Credits earned per year: Up to 4 credits maximum
• 2025 earnings per credit: $1,810 (so $7,240 earns 4 credits)

Medicare qualification: Automatic enrollment at age 65 if you qualify for Social Security

You can get on Medicare when you turn 65. You can start claiming Social Security retirement at any age between 62 and 70, and benefits increase the longer you wait. The Social Security program also offers income benefits for qualifying disabled workers and survivors of deceased workers – although you must have some work history to qualify, you don't need the full 40 credits.

Manage FICA taxes with Xero

Xero automates FICA tax calculations and compliance so you never miss a payment or filing deadline. Our payroll tools handle:

Automated calculations:

• FICA tax rates: Automatically updated with current rates and wage caps
• Employee withholding: Precise calculations for every pay period
• Employer matching: Automatic calculation of your matching contributions

Compliance management:

• Tax deposits: Automated federal payroll tax deposits
• Quarterly returns: Streamlined filing process
• Year-end reporting:W-2s and tax forms generated automatically

Xero accounting software also syncs with online payroll apps that perform the specialized functions of your business.

Get one month free and see how Xero simplifies your payroll tax management.

FAQs on FICA taxes

Here are some typical questions about how FICA affects payroll and compliance.

What happens if my business doesn't withhold FICA taxes?

To avoid severe penalties, make sure you withhold FICA taxes on time. The IRS can assess a trust fund recovery penalty equal to 100% of the unpaid taxes against business owners and responsible parties.

Can I opt out of paying FICA?

No, most people cannot opt out of FICA taxes. Only these specific groups qualify for exemptions:

• Religious groups: Amish, Mennonites, and certain other recognized faiths
• Church organizations: Churches and qualified church-controlled organizations
• Specific visa holders: Certain non-resident aliens on particular visa types

How does FICA work across multiple jobs?

You should withhold FICA as usual from your employees' checks. When your employees file their annual income tax returns, they may receive a credit if they paid Social Security tax above the wage cap, or they may owe additional Medicare tax if their total wages exceed the threshold.

Are bonuses and commissions subject to FICA?

Yes – you must withhold FICA taxes and make matching contributions for all earned income paid to employees, including tips, overtime, bonuses, and commissions.

How do I handle FICA taxes on my employees' tips?

You must withhold FICA taxes from your employees' tips and pay the matching employer amount. You can claim a credit for the employer match when you file the annual income tax return for your business. As of 2025, although up to $25,000 in tip income is not subject to income tax, these payments are still subject to FICA taxes.