What Is FICA? The Tax on Every Paycheck, Explained

The Federal Insurance Contributions Act dates to 1935, the same era as Social Security itself. The "insurance" in the name is literal: the tax is priced as premiums for two federal insurance programs. The Social Security portion, formally OASDI (Old-Age, Survivors, and Disability Insurance), funds retirement checks, survivor benefits, and disability benefits. The Medicare portion funds hospital insurance, Medicare Part A.

Unlike income tax, FICA is flat-ish and unavoidable-ish. There is no standard deduction against it, no zero bracket, and your W-4 has no effect on it. It starts on the first dollar of covered wages. The flip side is that paying it builds an earnings record: your future Social Security benefit is computed from your 35 highest-earning years of FICA-taxed wages, which is why strategies that reduce FICA also, quietly, reduce the benefit those wages would have earned.

Whether those eventual benefits get taxed again in retirement is its own topic, covered in our guide to whether Social Security is taxable. Short version: for many retirees, up to 85% of benefits can land back in taxable income.

On a $5,000 monthly gross paycheck, FICA takes $382.50: $310.00 for Social Security and $72.50 for Medicare. Your employer sends the IRS another $382.50 of its own money for the match, which economists will tell you comes out of your wage anyway, but which never shows on the stub.

Two paycheck behaviors confuse people every year. First, high earners see their take-home pay jump late in the year: that is the 6.2% Social Security withholding switching off once year-to-date wages pass $184,500 (2026). Second, if you change jobs mid-year, the new employer starts the wage-base clock at zero, so both employers may withhold Social Security on the same annual earnings. The overpaid amount is not lost; it comes back as a credit on your Form 1040.

The rates have been fixed for decades; what moves every year is the Social Security wage base, which is indexed to national wage growth. For 2026 it is $184,500, up from $176,100 in 2025. The Medicare tax has had no wage cap since 1994, so the 1.45% runs on every dollar.

Read the last row carefully, because it is the one that drives planning. The combined 15.3% is what a self-employed person pays directly, and it is what an employee and employer pay together. On $100,000 of wages, FICA moves $15,300 to the Treasury before income tax starts. For a huge share of working Americans, that makes FICA the biggest tax they pay, which is exactly why the structures that legally reduce it, covered below, matter so much.

Since 2013, wages and self-employment income above a threshold pick up an extra 0.9% Medicare tax: $200,000 for single filers, $250,000 married filing jointly, $125,000 married filing separately. Employers do not match this piece. The thresholds are not indexed for inflation, so every year ordinary wage growth pushes more people into it.

The withholding mechanics create a predictable April surprise in both directions. Employers must start withholding the 0.9% once your wages from that employer pass $200,000, regardless of your filing status. A married couple each earning $150,000 has $300,000 of joint wages, owes the tax on $50,000, and had zero withheld for it. A single-income couple where one spouse earns $230,000 had the tax withheld on $30,000 but only owes it on wages above $250,000, and gets the difference back. If your household is near these lines, an extra line on Form W-4 or a quarterly estimate closes the gap.

High earners also meet a cousin of this tax: the 3.8% net investment income tax on investment earnings above the same thresholds. Different tax, same cliff, and the two together are why the effective marginal rate jumps around $200,000 to $250,000 of income.

Freelancers, contractors, and sole proprietors have no employer to split the bill with, so self-employment tax charges both halves: 12.4% Social Security up to the $184,500 wage base plus 2.9% Medicare, a combined 15.3%. Two adjustments keep it from being quite as brutal as it sounds. The tax applies to 92.35% of net self-employment earnings, not 100%, which stands in for the employer-half deduction a business gets. And half of the self-employment tax you pay comes back as an above-the-line income tax deduction.

To see your own number, run the self-employment tax calculator. And remember the quarterly rhythm: no employer is withholding any of this for you, so self-employment tax is the main reason estimated tax payments exist.

Here is the structural fact underneath every "S corp tax savings" article you have ever seen: FICA and self-employment tax apply to wages and self-employment earnings. They do not apply to S corporation profit distributions. An owner who works in the business must take a reasonable W-2 salary, with normal FICA on it, but profit above that salary flows out as distributions that no payroll tax touches.

Three honest caveats before anyone gets excited. The salary must be defensible against what the work would cost to replace; the IRS reclassifies distributions as wages when it is not, with back payroll taxes and penalties attached. Lower wages also mean a lower Social Security earnings record, so part of the "savings" is a benefit trade. And the election adds real overhead: payroll runs, a separate return, and state-level quirks. Model it before electing: start with what an S corp actually is, then put your own numbers into the S corp savings calculator.

Tips: still FICA wages, deduction or not.

The One Big Beautiful Bill Act's "no tax on tips" provision is an income tax deduction of up to $25,000 of qualified tips for 2025 through 2028, phasing out above $150,000 of income ($300,000 joint). It does not touch FICA: every reported tip dollar still pays 7.65% employee-side payroll tax, and employers still owe the match. Whether that surprises you or not, it keeps tips building your Social Security record. The mechanics, occupation list, and phase-out math live in our no tax on tips guide.

Household employees: the Schedule H rule.

Pay a nanny, housekeeper, or in-home caregiver $3,000 or more in cash wages in 2026 and you are an employer for FICA purposes: 7.65% withheld (or absorbed) plus your 7.65% match, reported on Schedule H with your Form 1040. Wages paid to your spouse, your child under 21, generally your parent, or a worker under 18 for whom the job is not their principal occupation are exempt. Handing a caregiver a 1099 instead is misclassification, not a strategy.

Kids on the payroll of a parent's business.

A sole proprietor (or a partnership owned only by the child's parents) can pay a child under 18 for real work with no FICA on either side, one of the cleaner family tax plays in the code. The exemption disappears if the business is a corporation, including an S corp, which is a detail that surprises owners who incorporated for the payroll-tax savings above.