FICA, Social Security, and Medicare taxes explained

In short

A friend of mine once held up his first paycheck and asked where a big slice of it had gone. If you have ever done the same, you are in good company, and the answer is simpler than it looks. FICA is the payroll tax that pays for Social Security and Medicare, and it comes out of nearly every paycheck before you see a dime. The Social Security part is the current figure, which the official source publishes each year of your pay, up to a yearly cap called the wage base, which is the current figure, which the official source publishes each year. The Medicare part is the current figure, which the official source publishes each year of all your pay, with no cap at all. Your employer pays a matching share on top, so the total sent in on your behalf is bigger than what you see. Check your pay stub, find the lines marked OASDI and Medicare, and you will know exactly what you paid.

The whole of it

What it is

I once watched a retired mail carrier explain his monthly check to a neighbor, and he said something I have never forgotten. He said it was money he had paid in, one paycheck at a time, for forty years. That is the heart of FICA. The letters stand for the Federal Insurance Contributions Act, the law that set up these payroll taxes.

FICA is really two taxes bundled together. The first funds Social Security, which pays retirement, disability, and survivor benefits. On your stub it often appears as OASDI, short for Old Age, Survivors, and Disability Insurance. The second funds Medicare, the federal health insurance program for people age 65 and older and for some younger people with disabilities.

Both taxes come straight out of your wages. You never get the chance to spend that money first. It also differs from income tax, which is a separate matter handled with a different form and a different set of rules. Think of FICA as a contribution toward benefits you may collect later, and income tax as the general bill that pays for the rest of government.

How it works

If you are on a payroll, your employer takes FICA out of each paycheck and sends it to the government for you. You never write a check yourself. The employer also pays its own matching amount of Social Security and Medicare tax. That match is not taken from your pay. It is an added cost to the business.

The Social Security piece has a ceiling. Once your pay for the year passes the wage base, which is the current figure, which the official source publishes each year, the tax on Social Security stops for that year. The Medicare piece has no ceiling. Every dollar of wages is taxed for Medicare.

There is one more wrinkle worth knowing. The law adds an extra Medicare tax of the current figure, which the official source publishes each year on wages above a set threshold, which is the current figure, which the official source publishes each year for a single filer. The employer alone does not match this extra tax. It falls on the worker only.

If you work for yourself, the picture changes. A self employed person pays both halves, the worker share and the employer share, through what is called self employment tax. The rate is the current figure, which the official source publishes each year on net earnings, and the person may deduct half of it when figuring income tax. That deduction softens the blow a little.

The numbers, and where to find yours

I have a habit of checking the official page before I trust any figure I hear on the porch, and I would urge the same for you. Rates and limits are set by law, and they can move from year to year.

The Social Security rate for employees is the current figure, which the official source publishes each year. The wage base is the current figure, which the official source publishes each year. The Medicare rate for employees is the current figure, which the official source publishes each year. The extra Medicare tax is the current figure, which the official source publishes each year above the current figure, which the official source publishes each year for a single filer. Self employed workers pay the current figure, which the official source publishes each year.

Where do you find your own numbers? Start with your pay stub. Look for lines labeled Social Security, OASDI, or FICA SS, and another labeled Medicare. Next, look at Box 4 and Box 6 on your Form W-2. Box 3 shows wages subject to Social Security tax, and Box 5 shows wages subject to Medicare tax. For the current year's rates and limits, the Social Security Administration and the Internal Revenue Service both publish them on their official sites. The IRS also has a page on the Federal Insurance Contributions Act that you can read in plain language.

A worked example

A woman named Dolores Whitfield took a job at a hardware distributor, and her salary was $52,000 a year. She got paid every two weeks, which made 26 paychecks. Her gross pay each time was $52,000 divided by 26, which is $2,000.

Her Social Security tax was the current figure, which the official source publishes each year of each paycheck. To keep the math plain, suppose that rate is 6.2 percent. Then 6.2 percent of $2,000 is $124. Her Medicare tax, if the rate is 1.45 percent, is 1.45 percent of $2,000, which is $29. Added together, her FICA tax on one paycheck is $124 plus $29, or $153.

Over the whole year, that is $153 times 26 paychecks, which comes to $3,978. Her salary stayed far below the wage base, so none of her Social Security tax stopped early. The $52,000 was fully taxed for both pieces.

Her employer matched the same amounts. That is another $3,978 sent in by the company for her, bringing the total to $7,956. Dolores saw only the first half leave her pay, but her work generated both.

Now suppose she took a second job one year and her pay climbed well past the wage base. The Social Security tax would stop once her wages crossed that limit. The Medicare tax would keep coming out on every dollar. That is why higher earners see their paychecks swell late in the year. The Social Security line simply drops off.

Where it goes wrong

I have known more than one good person who got tangled in this, and none of them were careless. The mistakes come from honest confusion.

One common slip is mixing up FICA with income tax. They are separate. A person can owe little or no income tax and still pay full FICA, because FICA has no standard deduction and starts with the first dollar earned. That surprises many first time workers.

Another is holding two jobs. Each employer withholds Social Security tax as though it were your only job. If your combined pay passes the wage base, too much may be taken out. The extra comes back to you as a credit when you file your tax return. Keep your W-2s for that reason.

A third trouble spot is misclassification. Some workers are treated as independent contractors when the law may see them as employees. Then the worker pays the full self employment tax instead of half. If you suspect that has happened, the IRS has a form to ask for a ruling, and the Department of Labor offers guidance too.

Last, tips deserve a word. Tip income counts as wages for FICA, and the worker has to report it to the employer. Employers and the IRS both rely on that report, and a daily tip record is the usual way workers back it up.

Questions to answer before you leave this page

If you opened your latest pay stub right now, could you point to the Social Security line and the Medicare line and say what each one took? Do you know whether your wages are likely to pass the wage base of the current figure, which the official source publishes each year this year, and what that would change about your paychecks? If you hold two jobs, have you checked whether your combined pay might lead to extra withholding that you could claim back? If you work for yourself, have you figured out what the current figure, which the official source publishes each year of your net earnings comes to, and set that money aside? Have you looked at Box 3 and Box 5 on your W-2 to make sure the wage figures match your own records? And have you made an account at the Social Security Administration website so you can see the earnings record that your contributions are building?