How Does Social Security Play Into FICA Taxes Paid by Most Employees & Employers?
Written by
Ashley Donohoe
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When viewing your pay stub, you’ll likely come across deductions for Federal Insurance Contributions Act (FICA) taxes alongside your income taxes. Some of this money goes toward funding the Medicare program for health insurance. However, the larger portion goes toward the Old Age, Survivors and Disability Insurance (OASDI) program, better known as Social Security.Â
How Much FICA Taxes Cost You
These taxes are mandatory. Employees and employers split the amount, totaling 15.3% of gross income. Each side pays 6.2% for Social Security taxes and 1.45% for Medicare taxes. If you’re self-employed, you must cover it all and make quarterly estimated payments, though the IRS lets you deduct the employer portion on your tax return.
Some good news is there is a limit on Social Security tax. Per the Social Security Administration (SSA), it doesn’t apply to income higher than $168,600 in 2024, and this ceiling rises annually. This means that your maximum 2024 Social Security tax amount would be around $10,453 if you’re an employee and $20,906 if you’re self-employed.
In addition to these taxes, high-earning taxpayers pay an extra 0.9% toward Medicare. The thresholds vary by filing status and range from $125,000 to $250,000.
There are rare occasions where you might not have to pay Medicare or Social Security taxes. For example, you could be exempt if you’re a young worker, foreign government employee, non-resident alien or eligible religious group member. Situations vary, and you may need to submit a form to qualify.
How FICA Taxes Affect Social Security Payments
The Social Security taxes you pay don’t get put in a personal account or directly fund your potential benefits. Instead, you earn work credits that depend on your yearly earnings, ultimately impacting your eligibility. When you apply for disability or retirement benefits, the SSA considers your average earnings over a certain number of years in deciding your monthly benefit amount.
Your current contributions cover payments for today’s recipients, so you’ll rely on future contributions to fund yours. There’s an imbalance of taxes paid versus benefits received, as it’s more common get more than you paid toward Social Security over your working years.Â
As more people qualify for benefits, this system raises concerns about Social Security funds running out during the next decade. This could result in several changes in the future, including increased payroll taxes, the elimination of the Social Security earnings cap or reduced benefits.
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