If you run a business or manage payroll, you’ve probably come across the term FICA. It might sound like just another payroll acronym, but FICA is one of the most important tax obligations that employers and employees face. Understanding what it is, how it works, and what your responsibilities are can help you stay compliant and avoid costly mistakes.
Let’s break it down in plain English.
Introduced in 1935, the Federal Insurance Contributions Act (FICA) is a mandatory payroll tax used to fund two essential federal programs: Social Security and Medicare. Every time you run payroll, a portion of employee wages goes toward these programs, and as the employer, you match those contributions.
While it might feel like just another deduction on a pay stub, FICA funds the retirement, disability, and healthcare benefits that millions of Americans rely on.
FICA is made up of two separate taxes that are bundled together.
Social Security Tax supports the Old-Age, Survivors, and Disability Insurance (OASDI) program. For 2025, the tax rate is 6.2% of gross wages, up to a wage base limit of $176,100. Both the employer and the employee contribute equally, so you’ll withhold 6.2% from the employee’s pay and contribute an additional 6.2% yourself.
Once an employee hits the $176,100 wage cap, you no longer withhold Social Security taxes for the rest of the year. The maximum contribution per party comes out to $10,918.20 in 2025.
Medicare Tax funds health insurance for Americans aged 65 and older. It works slightly differently than Social Security. There is no wage cap, so the 1.45% tax applies to all earnings. Again, both the employer and the employee contribute equally.
In addition, high earners are subject to an Additional Medicare Tax of 0.9%. This surtax kicks in once an employee earns over $200,000 in a calendar year. Unlike the regular Medicare Tax, this surtax is only paid by the employee. Employers are responsible for withholding it once the threshold is crossed, but they do not match it.
It’s easy to confuse FICA with federal income tax, but they are not the same. Income tax is based on an employee’s overall taxable income and varies depending on factors like filing status and deductions. FICA, on the other hand, is a flat tax with fixed percentages. It does not change based on income brackets or deductions.
So when you see a pay stub with both FICA and federal withholding lines, know that they serve different purposes. Federal income taxes fund a wide range of government operations, while FICA funds specific social insurance programs.
Yes, paying FICA taxes is mandatory for nearly every employee and employer in the United States. It applies to all earned income, meaning wages and salaries, but not to things like investment income or rental property profits.
Most workers will automatically see FICA withheld from their paychecks. Employers are legally required to handle this on the employee’s behalf, then submit both their portion and the employee’s portion to the IRS.
For self-employed individuals, the process is different. They pay FICA through what’s called SECA - the Self-Employed Contributions Act. Instead of splitting the taxes like an employer and employee would, the self-employed pay the full 15.3% (12.4% for Social Security and 2.9% for Medicare) themselves. The upside is that they can deduct the employer portion when calculating their adjusted gross income.
If you’re managing payroll in-house or using software to help, it’s critical to account for FICA during payroll calculations. These taxes must be withheld from each paycheck and reported properly to the IRS on a quarterly basis using Form 941.
For example, if an employee earns $3,000 in a biweekly pay period, you’ll need to withhold $186 for Social Security (6.2%) and $43.50 for Medicare (1.45%). Then, you’ll also contribute those same amounts as the employer. That’s $459 in total FICA taxes just for one employee in one pay period.
When you multiply that across your workforce, the responsibility adds up fast - which is why it’s so important to track it carefully.
If you hire a high-earning employee who already reached the Social Security wage cap at their previous job, do you still need to withhold Social Security taxes?
The IRS says yes. Employers are only responsible for withholding and matching FICA taxes based on what they pay the employee. If someone earned $176,100 earlier in the year with another employer, but only $50,000 with you, you’ll still withhold FICA as if it’s a new calendar year. The employee can request a refund for any overpayment when they file their individual tax return.
Withholding the taxes is just the beginning. You’re also responsible for depositing them with the IRS. This is typically done on a semiweekly or monthly basis, depending on your total payroll volume. Then, each quarter, you file Form 941 to reconcile your deposits and report totals for wages paid, taxes withheld, and employer contributions.
Late deposits can trigger penalties and interest, so it’s essential to stick to the IRS schedule. If you’re not sure when your payments are due, the IRS provides a deposit calendar and publication 15 that outlines your obligations.
FICA is often viewed as just another line item on a paycheck, but its impact is significant. It ensures that workers have access to basic income and healthcare coverage in retirement or in the event of a disability. It’s also a huge portion of your legal obligations as an employer.
Mismanaging FICA - whether through incorrect calculations, late payments, or inaccurate reporting - can lead to hefty penalties. That’s why many growing businesses look for a reliable payroll partner to manage these responsibilities correctly and consistently.
If you’re feeling overwhelmed by the fine print of FICA taxes, payroll calculations, or IRS reporting, you’re not alone. Compliance is complex, and the stakes are high. At Paypro, we make payroll and tax administration seamless, accurate, and compliant. From automated withholdings to tax filing, we help businesses like yours stay focused on growth - not red tape.
Talk to a Paypro specialist today and see how we can take the stress out of payroll and tax compliance.