What Is the FICA Tax: Social Security and Medicare Tax

For employees and employers in US, it is essential to adhere to the FICA tax requirements to ensure the accurate payroll process and avoid any federal penalties. In other words, the taxes cover social security and Medicare contributions that should be paid both by employees and employers at the rate of 7.65%. Moreover, a company owner can be held responsible for the Trust Fund Recovery Penalty in case of failing to comply with the law.

To avoid such undesirable outcomes and maintain the cash flow, it is crucial to keep track of the yearly changes and limits of wages and taxes.

FICA the Federal Insurance Contributions Act is the US law that requires both employees and employers to contribute to Social Security and Medicare through payroll deductions. FICA taxes are withheld from every employee's paycheck and matched dollar-for-dollar by the employer, funding the country's social insurance programmes.

For small business owners, FICA compliance is non-negotiable: failure to withhold and remit FICA taxes triggers the IRS Trust Fund Recovery Penalty, a personal liability that survives bankruptcy.

FICA Tax Rates (2025/2026)

Social Security Wage Base

Social Security tax (6.2% employee + 6.2% employer) applies only up to the annual wage base. Once an employee's cumulative wages for the year exceed the wage base, Social Security tax stops is no longer withheld from that employee and the employer stops matching. Medicare tax (1.45% + 1.45%) has no wage base cap, it applies to all wages.

Additional Medicare Tax (0.9%)

High earners pay an Additional Medicare Tax of 0.9% on wages above certain thresholds. The employer does NOT match this additional tax, only the employee pays it. Employers are required to withhold the additional 0.9% from wages once they exceed $200,000 in a calendar year, regardless of filing status. The thresholds at which the full additional tax applies (on combined income) vary by filing status:

Important: Employers withhold based on the $200,000 single-employee threshold regardless of the employee's filing status. If an employee's additional tax obligation differs (e.g., MFJ couple where each earns $160,000, combined $320,000 > $250,000 threshold), they reconcile via Form 8959 on their individual return.

How FICA Tax is Calculated, Worked Example

Who is Exempt from FICA?

• Student employees working at the college or university they attend (under certain conditions)
• Non-resident aliens on certain visa types (F-1, J-1, M-1, Q-1 students and scholars)
• Some state and local government employees covered under alternative retirement plans
• Members of certain religious groups that have filed Form 4029 for an exemption
• Self-employed individuals pay a Self-Employment Tax (SE Tax) of 15.3% instead of FICA, this is the equivalent of both employee and employer FICA shares; they can deduct the employer-equivalent half on Schedule 1

FICA Tax and the Trust Fund Recovery Penalty

FICA taxes withheld from employee wages are held 'in trust' by the employer until deposited with the IRS. If the employer fails to deposit these funds, the IRS may assess the Trust Fund Recovery Penalty (TFRP): a personal liability equal to 100% of the unpaid trust fund taxes against any 'responsible person' (owner, officer, accountant, bookkeeper) who wilfully failed to ensure the deposits were made. This penalty bypasses the corporate liability shield and survives business closure or bankruptcy.

We stepped in immediately, audited their historical Form 941 filings, established that a third-party payment processing lag caused the delay, and negotiated an installment agreement that halted personal enforcement actions while transitioning them to an automated payroll schedule.

Where It Shows Up on a Payslip

Employees frequently ask about these deductions, and the payslip rarely explains them clearly. Being able to answer removes a recurring conversation.

• The employee's share is deducted from gross pay and appears as a deduction
• The employer's matching share does not appear on the payslip at all, because it is not the employee's money
• The two together are remitted by the employer, which is why the employer carries the compliance risk
• Taxable wages for these purposes can differ from gross pay, because some pre-tax deductions reduce one and not the other

That last point is the source of most confusion. An employee comparing the boxes on their annual statement will often find they do not agree with each other, and that is usually correct rather than an error.

The Self-Employed Pay Both Halves

Someone working for themselves pays the equivalent of both the employee and the employer share, which is the single biggest financial shock for people leaving employment to work for themselves.

It is charged on net earnings rather than on gross receipts, so every legitimate business expense reduces it as well as reducing income tax. A portion of it is itself deductible in arriving at income, which softens the effect without removing it.

For a business owner taking income partly as salary and partly in another form, how the business is structured and classified affects how much of the profit is subject to this charge at all. That is a genuine planning question with its own obligations attached, and it is worth modelling properly rather than assuming a structure change is automatically better.

Common Errors in Small Business Payroll

The calculation is mechanical, and the errors come from setup rather than arithmetic.

Benefits and deductions configured with the wrong tax treatment, so amounts that should be excluded are included or the reverse. An employee who works in more than one entity within a group, where each employer applies limits to its own payments. Bonuses and commissions treated differently from regular pay when they should not be. And owners drawing money in a way that was never run through payroll at all.

The catch-all is a quarterly reconciliation of the payroll reports to the wages and payroll tax accounts in the ledger. An hour each quarter finds problems while they are still correctable, rather than at year end when correcting them means amended returns. Current rates and wage bases are published by the IRS each year.

FAQs

Written by

Ankit Sarawagi, CPA, CA, MBA

Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn