What does FICA stand for? And how it affects your payroll taxes
FICA is payroll tax for Social Security and Medicare. Learn how it works and how it affects your business payroll.
Written by Kari Brummond—Content Writer, Accountant, IRS Enrolled Agent. Read Kari's full bio
Table of contents
Key takeaways
- FICA is a payroll tax that funds Social Security and Medicare – both employers and employees contribute.
- Self-employed taxpayers pay both the employee and employer portions of FICA tax.
- FICA taxes are different from federal income taxes and show up separately on pay stubs.
- Employers must ensure proper withholding, match employee contributions, and file returns on time.
- Sync payroll apps with Xero to automate FICA calculations, tax deposits, and payroll returns.
What does FICA stand for?
FICA stands for the Federal Insurance Contributions Act of 1935. FICA taxes help fund the Social Security and Medicare programs. Employers withhold FICA taxes from employee pay and remit them to the government, along with a matching employer payment. Self-employed people pay both the employee and employer portions of these taxes.
Your payroll tax returns show how much was due based on wages paid.
How FICA appears on an employee’s pay stub
Employee pay stubs show their gross pay, income tax, FICA withholding, and other deductions (like contributions to retirement accounts or healthcare premiums), and net (‘take home’) pay.
Let's say an employee earns $1000. Their pay stub will show something like this:
- Gross pay: $1000.00
- Social Security: $62.00
- Medicare: $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 – Xero can help you do payroll correctly
FICA rates and wage caps
The base rate for FICA taxes is 7.65% for employees and a matching 7.65% payment from employers. Self-employed people pay a combined rate of 15.3%. There are a few exceptions related to Social Security and Medicare.
Social Security taxes
Social Security tax is 6.2% for wages up to $176,100, as of 2025. Over this, you don't have to pay Social Security tax m– so 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. There's no cap, so it applies to all income.
Additional Medicare tax for high earners
Earned income over certain thresholds faces an additional Medicare tax of 0.9%, bringing the 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 must withhold employee FICA taxes and then make a matching payment. For example, if an employee earns $50,000 during the year, the results are:
- Employee payment: $3825
- Employer payment: $3825
- Total FICA taxes: $7650
The employer doesn't have to match the additional Medicare tax in situations where that applies.
What is FICA tax for small business owners?
If you’re a small business owner, including a freelancer, you must pay the employee and the employer's portion of FICA taxes. But you also get to claim a tax deduction for a portion of the taxes you’ve paid.
Understanding SECA
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.
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 $5355, 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
While most workers and employers must pay FICA taxes, there are several exemptions and special cases where certain individuals or organizations do not have to pay:
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. 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.
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 fund the Social Security and Medicare programs. Social Security provides retirees with monthly payments based on their earnings history. To qualify, you must have at least 40 credits – you can earn up to 4 credits per year – as of 2025, you must earn $1810 to get 1 credit or $7240 for 4 credits. If you have enough credits to get Social Security, you also qualify for Medicare.
You can get on Medicare when you turn 65. You can start claiming Social Security retirement at any age between 62 and 70 – benefits are increased 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 simplifies your payroll and saves you time with tools that handle all your FICA- and payroll-related tasks, like:
- FICA tax rate updates
- Income tax calculations
- Employee withholding tax
- Employer matching
- Federal and state unemployment taxes
- State withholding tax
- Automated federal payroll tax deposits
- Quarterly payroll returns
- Year-end reporting to employees, IRS, and the state.
Xero accounting software also syncs with online payroll apps that perform the specialized functions of your business.
Try Xero for free now to simplify 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?
Your business could be penalized for the taxes that should have been withheld. For example, the IRS may assess a trust fund recovery penalty worth 100% of the taxes that should have been withheld against responsible individuals in the business.
Can I opt out of paying FICA?
Generally, no – unless you meet one of the rare exemptions, such as being Amish, running a church or church-controlled organization, or being a non-resident alien on a specific type of visa.
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, but you can claim a credit for the employer match when you file the annual income tax 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.
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