The Federal Insurance Contributions Act, or FICA, requires employers to withhold Social Security and Medicare taxes from employees' wages. These taxes are assessed directly on wages paid, with none of the deductions and adjustments that complicate income taxes. As a result, calculating the proper amount of FICA withholding for an employee is fairly straightforward.
Social Security Tax
The FICA tax rate for Social Security is 6.2 percent of an employee's wages. However, the FICA law limits how much of any employee's wages are subject to Social Security tax. As of 2015, that limit was $118,500. What that means is that an employer withholds Social Security from the first $118,500 anyone makes, and no Social Security tax on all income above that. Therefore, the maximum any employee would pay would be $7,347, or 6.2 percent of $118,500. The annual limit adjusts with inflation.
The basic Medicare tax rate under FICA is 1.45 percent of all wages, with no upper limit. There used to be an upper limit on the amount of wages subject to Medicare tax, similar to the limit on Social Security tax, but that limit was eliminated in 1993.
Additional Medicare Tax
The Affordable Care Act of 2010 amended FICA to add a second tax to fund Medicare. It's known as the "Additional Medicare Tax," to differentiate it from the 1.45 percent Medicare tax that applies to all wages. Employers must withhold 0.9 percent of wages paid to an employee in excess of $200,000 a year. A higher-income employee will pay 1.45 percent on all wages up to $200,000 and 2.35 percent on all wages above $200,000.
Both employees and employers pay FICA taxes. For Social Security, employers must pay a tax equal to 6.2 percent of each employee's wages up to the annual limit. That's in addition to the 6.2 percent the employer withholds from workers' pay. The same employer match applies to the 1.45 percent Medicare tax. In total, then, employers and employees will pay a combined 12.4 percent for Social Security and 2.9 percent for Medicare. The employer does not have to match the 0.9 percent Additional Medicare Tax, however. Only employees pay that.
Self-employed people are both employee and employer, so they have to pay both sides of FICA taxes. However, these taxes apply only to business profit -- business income minus business expenses. For Social Security, self-employed people pay 12.4 percent on their first $118,500 worth of taxable profit. For Medicare, they pay 2.9 percent on all taxable profit. They also must pay the 0.9 percent Additional Medicare Tax if their income is high enough. Self-employed individuals may also deduct half of their total FICA taxes, representing what an employer pays, on their personal form 1040 tax return.
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