Finance term
FICA (Federal Insurance Contributions Act)
Also known as: FICA tax, payroll tax, Social Security tax, Medicare tax
Definition
FICA is the 15.3% combined payroll tax funding Social Security (12.4%) and Medicare (2.9%) — split equally between employee (7.65%) and employer (7.65%). Self-employed individuals pay both halves as self-employment tax.
Detailed explanation
FICA (Federal Insurance Contributions Act) establishes the mandatory payroll taxes that fund Social Security and Medicare. For W-2 employees, the burden is split: the employee pays 7.65% withheld from each paycheck, and the employer pays a matching 7.65% — together totaling 15.3%. The employer's share is a business expense (deductible). The employee's share reduces their take-home pay.
Breakdown: Social Security tax is 12.4% (6.2% each side) on wages up to the Social Security wage base ($168,600 in 2024, adjusted annually by the SSA at https://www.ssa.gov/news/press/factsheets/colafacts2024.pdf). Medicare tax is 2.9% (1.45% each side) with no wage ceiling. An additional 0.9% Medicare surtax applies to employee wages exceeding $200,000 (single) / $250,000 (married filing jointly) — employer does not match the 0.9% surtax.
For business owners who are self-employed (sole props, single-member LLCs, partners), FICA doesn't apply — instead, the self-employment tax (Schedule SE) covers both halves of FICA at 15.3% on net self-employment earnings. S-corp owners can reduce SE tax by paying themselves a reasonable W-2 salary (paying FICA only on salary, not on distributions).
FICA is an employer obligation even before the business is profitable — payroll tax deposits must be made on schedule regardless of business cash flow. Failure to deposit FICA on time results in Trust Fund Recovery Penalties (TFRP), which are 100% penalties assessed personally against responsible persons (including business owners and officers). The IRS treats unpaid payroll taxes as among the most serious business tax violations.
The IRS provides detailed FICA guidance in Publication 15 (Circular E) at https://www.irs.gov/publications/p15, covering deposit schedules, rates, and employer responsibilities. The Social Security Administration publishes annual FICA wage base updates at https://www.ssa.gov/oact/cola/cbb.html.
◈ Worked example
- Employee earning $5,000/month: withholds $382.50 FICA (7.65%); employer pays matching $382.50 — total FICA $765/month
- Business with 10 employees at average $60K salary: $91,800/year in employer FICA contributions
- Self-employed consultant earning $100K net: pays $15,300 SE tax (both halves); deducts half ($7,650) on Schedule 1
Common questions
The most-asked questions about FICA (Federal Insurance Contributions Act) — answered straightforwardly.
What is the FICA rate? +
15.3% total: 12.4% for Social Security (6.2% employee + 6.2% employer) and 2.9% for Medicare (1.45% + 1.45%). Social Security applies only up to the annual wage base ($168,600 in 2024). Medicare applies to all wages with an additional 0.9% surtax on high earners. Self-employed pay all 15.3% as self-employment tax.
Can a business owner reduce FICA by forming an S-corp? +
Yes — S-corp owners pay FICA only on their W-2 salary, not on distributions. A business owner earning $200K who takes $100K as salary and $100K as distribution pays FICA on $100K (≈$15,300 FICA) instead of on the full $200K (≈$30,600 SE tax) — saving ~$15,300. The S-corp election has compliance costs; savings must exceed those costs.
What is the Trust Fund Recovery Penalty? +
The IRS's 100% penalty for willful failure to collect or pay over employee FICA and income tax withholdings. It can be assessed personally against any 'responsible person' — owner, officer, bookkeeper — who had authority over payroll decisions. Unpaid payroll taxes are an IRS priority enforcement category.
Further reading
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