What Is the FICA Tax Rate? Everything You Need to Know
Two of the three largest pieces of the federal budget — accounting for over a third of total federal spending are Medicare/Medicaid and Social Security. These two programs represent an essential safety net for most Americans, giving everyone a backstop they can count on to ensure that they won’t spend their golden years struggling to afford basic necessities.
Here’s a closer look at the rates you pay for FICA taxes, what your employer pays and how that can change if you’re self-employed.
What Is FICA?
The acronym FICA stands for the Federal Insurance Contributions Act, which was the 1935 act that authorized collecting revenue through payroll taxes for Social Security. The decision to use payroll taxes was intentional so that it would ensure that the program would be able to survive because eliminating the Social Security Administration (SSA) and the payments it doles out would essentially mean robbing people of a benefit they already paid for.
“We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits,” said President Franklin Roosevelt of the decision in 1941. “With those taxes in there, no damn politician can ever scrap my Social Security program.”
Medicare, meanwhile, came into existence in 1965 as a part of President Lyndon Johnson’s Great Society. It reflected the difficulties that older Americans had in securing health insurance, given the high cost of covering the elderly.
FICA Tax Rate
All told, with the Federal Insurance Contributions Act, 12.4% of your paycheck is paid to the government for Social Security taxes and another 2.9% for Medicare, for a total FICA tax rate of 15.3%. If that seems steep, it’s because you aren’t paying the entirety of that. The taxes are split between you and your employer, so you’ll only see payroll tax rates of 6.2% withheld for Social Security and 1.45% for Medicare with the remainder being paid by your company.
Those taxes are different for high earners, though. There’s an additional Medicare Tax of 0.90% added for incomes over $200,000, bringing that total tax to 3.8% of which employees owe 1.9%.
There is also a cap on wages that can be subjected to Social Security tax. It changes from year to year; for 2021 it’s $142,800. That reflects the fact that your ultimate Social Security benefit is also capped, so you won’t pay for any more than you can expect back when you reach retirement. So, your Social Security rate can be very different if you earn much more than $142,800 a year, and that information is recorded in your Social Security information by the SSA and reflected in the maximum monthly available to you when you do start drawing benefits.
FICA Rate (Initially) Different for Self-Employed Workers
The nature of payroll taxes is fundamentally different for anyone who is self-employed. Instead of having your FICA taxes withheld from your pay, you’ll receive the full, pretax amount with each check and be responsible to self-report your earnings and pay your share of payroll taxes then.
Self-employment taxes come to 15.3% — 12.4% for Social Security and another 2.9% for Medicare. However, that changes for high earners, just like it does for FICA taxes, with your Social Security taxes only applying to the first $142,800 in earnings and an additional 0.9% Medicare tax on earnings over $200,000 a year.
Fortunately for the self-employed, you aren’t ultimately on the hook for that entire amount, though. Half of your taxes — the amount that would have been paid by your employer — are deductible from your final income tax payments.
Self-employment taxes are usually paid each quarter, every three months, as part of your estimated tax payment. Use Form 1040-ES to calculate your estimated tax payments for 2021. There is a penalty for failing to send in your estimated tax payments, but the majority of taxpayers avoid this if they owe less than $1,000 after subtracting all withholding and credits
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Cynthia Measom contributed to the reporting for this article.
Last updated: Feb. 24, 2021