The Old Age, Survivors, and Disability Insurance Program (OASDI) tax, more commonly referred to as the Social Security tax, is calculated as a set percentage of a worker’s income. The amounts calculated are taken from each paycheck or they’re included in the estimated tax payments made by the self-employed. Social Security tax rates are determined by law each year and apply to both employees and employers.

Employees and employers each pay a Social Security tax rate of 6.2% of employee compensation for a total of 12.4% in 2024. Those who are self-employed are liable for the full 12.4%.

The combined taxes withheld for Social Security and Medicare are referred to as the Federal Insurance Contributions Act (FICA) taxes. Social Security taxes are referred to as OASDI and Medicare is shown as Fed Med/EE on your pay statement.

Both Social Security and Medicare are federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.

How Social Security Works

The Social Security program provides benefits to retirees and those who are otherwise unable to work due to disease or disability. Social Security often provides the only source of consistent income for people who can no longer work.

Social Security is a government program funded through a withholding tax that deducts a set percentage of pretax income from each worker’s paycheck. Workers who contribute for at least 10 years are eligible to collect benefits based on their earnings history when they reach retirement age or if they suffer a disability.

Social Security benefits are limited to a maximum monthly benefit amount that’s based on the individual’s earnings history. There’s also a limit on the amount of annual wages or earned income that’s subject to this taxation. This prevents workers from paying more in taxes than they can later receive in benefits. It’s called a tax cap.

Wages Subject to Taxation

The maximum amount of income subject to the OASDI tax was $160,200 in 2023, capping the maximum annual employee contribution at $9,932.40. The maximum amount of income subject to the tax increased to $168,600 in 2024, capping the maximum annual employee contribution at $10,453.20. The amount is set by Congress and can change from year to year.

The wage limit is inflation-indexed annually and can be found in IRS Publication 15 for most employees and in Publication 51 for agricultural workers. According to IRS Publication 15, wages subject to FICA for Social Security and Medicare include all income received for services performed unless specifically excluded. Payment doesn’t have to be made by cash or check.

Wages include salaries, bonuses, commissions, and paid vacation or sick time. Payments in-kind in the form of goods, lodging, food, clothing, or services are also included unless the employee is a household or agricultural worker. Elective contributions to a qualified retirement plan are also subject to FICA tax.

Wages Not Subject to Tax

Employer-paid accident or health insurance premiums for an employee and the employee’s spouse and dependents are not wages and they’re not included in FICA. Health Savings Account (HSA) contributions made by the employer are also not considered to be wages.

An individual who earns $30,000 per year might elect to contribute $4,000 to their 401(k) plan. Their employer matches 25% of that or $1,000. As far as Social Security is concerned, the individual’s wages are still $30,000 because their elective deferral contribution is still subject to the tax. The additional $1,000 contributed by the employer is not. The Social Security tax withheld from their pay is $1,860 or $30,000 x .062.

Tax Overpayments

An individual may pay more tax than is required if they earn more than the Social Security tax cap when earnings from more than one employer are added together. Any overpayment amount is applied to the individual’s federal tax bill or is refunded. Each employer must still match the tax contribution but they don’t receive a refund even if they become aware of the overpayment.

Calculating Social Security Taxes

Let’s say you earn $165,240 per year or $13,770 per month. The maximum in wages that can be taxed for Social Security is $168,600 in 2024 or $14,050 per month. You can therefore expect to see taxes withheld by your employer in the amount of $853.74.10 per month ($13,770 x .062) because your entire employee income falls under the $14,050 per month cap.

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Bear in mind that you’re considered to be both the employer and the employee for tax purposes if you’re self-employed. You’re liable for two 6.2% contributions for the full 12.4% tax rate. A self-employed person with the same salary would pay $1,707.48 per month for Social Security ($13,770 x .124).

FICA Taxes

If you earn a wage or a salary, you’re likely subject to Federal Insurance Contributions Act taxes. Not to be confused with the federal income tax, FICA taxes fund the Social Security and Medicare programs. Also known as payroll taxes, FICA taxes are automatically deducted from your paycheck. Your company sends the money, along with its match (an additional 7.65% of your pay), to the government.

Below, we’ll discuss what FICA taxes are, how they’re applied and who’s responsible for paying them.

Every payday, a portion of your check is withheld by your employer. That money goes to the government in the form of payroll taxes. There are several different types of payroll taxes, including unemployment taxes, income taxes and FICA taxes. Two types of taxes fall under the category of FICA taxes: Medicare taxes and Social Security taxes.

Paying FICA taxes is mandatory for most employees and employers under the Federal Insurance Contributions Act. The funds are used to pay for both Social Security and Medicare. If you own a business, you’re responsible for paying Social Security and Medicare taxes, too. Self-employed workers are referred to as SECA taxes (or self-employment taxes) based on regulations included in the Self-Employed Contributions Act.

FICA Tax Rates

Both SECA and FICA tax rates have increased since they were introduced. Social Security tax rates remained under 3% for employees and employers until the end of 1959. Medicare tax rates rose from 0.35% in 1966 (when they were first implemented) to 1.35% in 1985.

For the past couple of decades, however, FICA tax rates have remained consistent. Employers and employees split the tax. For both of them, the current Social Security and Medicare tax rates are 6.2% and 1.45%, respectively. So each party – employee and employer – pays 7.65% of their income, for a total FICA contribution of 15.3%. To calculate your FICA tax burden, you can multiply your gross pay by 7.65%.

Self-employed workers get stuck paying the entire FICA tax on their own. For these individuals, there’s a 12.4% Social Security tax, plus a 2.9% Medicare tax. You can pay these levies when you pay estimated taxes every quarter. To figure out how much you owe, you can use the worksheet and instructions provided by the IRS for Form 1040-ES.

Fortunately, if you’re self-employed, you’ll get to deduct half of the tax (7.65%) when you file your tax return. The self-employment tax deduction is an above-the-line deduction that you can use to lower your income tax bill. So you can claim it regardless of whether you’re itemizing your deductions or taking the standard deduction.

Wage Base Limits

A wage base limit applies to employees who pay Social Security taxes. This means that gross income above a certain threshold is exempt from this tax. The wage limit changes almost every year based on inflation. This income ceiling is also the maximum amount of money that’s considered when calculating the size of Social Security benefits:

• 2024 limit: $168,600
• 2023 limit: $160,200

Medicare taxes, on the other hand, don’t have a wage limit. But there’s an Additional Medicare Tax that high-income individuals must pay. That has been the case since Jan. 1, 2013.

The Additional Medicare Tax rate is 0.90% and it applies to the wages, salaries and tips of certain employees and self-employed workers. So any part of your income that exceeds a certain amount gets taxed for Medicare at a total rate of 2.35% (1.45% + 0.90%). That income ceiling is $200,000 for single filers, qualifying widows and anyone with the head of household filing status, $250,000 for married couples filing joint tax returns and $125,000 for couples filing separate tax returns. You can calculate how much you owe using Form 8959.

FICA Tax Exemptions

Just about everyone pays FICA taxes, including noncitizens. It doesn’t matter whether you work part-time or full-time. However, there are some exceptions.

For example, college students are exempt from paying FICA taxes on the wages they earn from an on-campus job. Exemptions also apply to some nonresident noncitizens, including foreign government employees and teachers. Certain religious groups (like the Amish) may apply for an exemption from FICA taxes by filing IRS Form 4029. But by not paying these payroll taxes, they waive the right to receive Medicare and Social Security benefits.

Overpaying FICA Taxes

Some employees pay more Social Security taxes than they need to. This could happen if you switch jobs more than once and all of your earnings are taxed, even if your combined income exceeds the Social Security wage base limit. Fortunately, you may be able to get a refund when you file your taxes.

If you have multiple jobs, you can claim the Social Security overpayment on Form 1040. If you owe any taxes, the IRS will use part of your refund to pay them off. Then, you’ll receive whatever is left over. If you overpaid Social Security taxes and you only have one job, you’ll need to ask your employer for a refund. Excess Medicare tax repayments are nonrefundable since there’s no wage base limit.

If you have more than one job, you may underpay the amount of FICA taxes you owe. If that happens, you’ll have to make separate estimated tax payments (unless you asked for additional withholding on your W-4 form).

Just about everyone pays FICA taxes, including noncitizens. It doesn’t matter whether you work part-time or full-time. However, there are some exceptions.

For example, college students are exempt from paying FICA taxes on the wages they earn from an on-campus job. Exemptions also apply to some nonresident noncitizens, including foreign government employees and teachers. Certain religious groups (like the Amish) may apply for an exemption from FICA taxes by filing IRS Form 4029. But by not paying these payroll taxes, they waive the right to receive Medicare and Social Security benefits.

Overpaying FICA Taxes

Some employees pay more Social Security taxes than they need to. This could happen if you switch jobs more than once and all of your earnings are taxed, even if your combined income exceeds the Social Security wage base limit. Fortunately, you may be able to get a refund when you file your taxes.

If you have multiple jobs, you can claim the Social Security overpayment on Form 1040. If you owe any taxes, the IRS will use part of your refund to pay them off. Then, you’ll receive whatever is left over. If you overpaid Social Security taxes and you only have one job, you’ll need to ask your employer for a refund. Excess Medicare tax repayments are nonrefundable since there’s no wage base limit.

If you have more than one job, you may underpay the amount of FICA taxes you owe. If that happens, you’ll have to make separate estimated tax payments (unless you asked for additional withholding on your W-4 form).

What Employers Should Know About FICA Taxes

Most companies and employees must pay FICA taxes, a sort of payroll tax, to the Internal Revenue Service (IRS). The payment amount for these taxes varies depending on how much your employees earn. This section explains more about what these taxes entail, including how much to withdraw from your employees’ paychecks and how much you must pay.

Introduced in the 1930s, FICA, or the Federal Insurance Contribution Act, is a U.S. law that requires employers and their employees to make contributions to fund Medicare and Social Security programs. FICA taxes come out of your employee’s paychecks, and as an employer, you typically must match what your employees contribute.

So, how much are FICA taxes? The FICA rate is set annually, although it doesn’t always change each year. For instance, the FICA rate stayed the same from 2019 to 2020. Since it’s based on a set percentage, employees who make a higher income typically pay more in FICA taxes. Although there’s no wage limit for Medicare, the maximum taxable earnings for employees in 2020 is $137,700 for Social Security.

Once an employee makes over $200,000 and files their taxes as unmarried, they must contribute an additional 0.9% in taxes for Medicare — but employers don’t have to match this additional percentage. Other employees who generally must pay an additional 0.9% include those who are married, file their taxes jointly and make $250,000 or more per year, as well as employees who make $125,000 or more per year and file their taxes as married filing separately.

How FICA taxes are calculated

Calculate how much your employees owe in FICA taxes by multiplying their gross pay by the Social Security and Medicare tax rates. Once you calculate this total, match how much your employee pays. Follow these general equations:

• Social Security calculation: Gross pay x 6.2% = Social Security contribution
• Medicare calculation: Gross pay x 1.45% = Medicare contribution
• Total FICA taxes calculation: Social Security contribution + Medicare contribution = Total FICA taxes

For example, if an employee’s gross wages are $1,200 per paycheck, you would multiply $1,200 x 6.2% = $74.40 to get their Social Security contribution. Then, take $1,200 and multiply it by the Medicare tax rate of 1.45% to get $17.40. The total FICA tax would be $91.80 per paycheck. Since employers are generally required to match this amount to pay their portion of the FICA tax, you’d also pay $91.80.

What payments are not subject to FICA taxes?

Keep in mind that FICA taxes only apply to your employees’ earned income (e.g., salaries, wages, bonuses), not income like dividends, short-term capital gains or pensions. Here are a few other payments that don’t require a FICA withholding:

• Any wages you pay after an employee’s death
• Any wages you pay to a disabled employee after they become eligible for Social Security benefits
• Standard employee expense reimbursements (e.g., travel expenses not exceeding government per diem rates)
• Payments to your own children if they’re under 18
• Tips that total less than $20 per month
• Workers’ compensation

Bottom Line

Since Social Security is a part of the FICA tax, the money from your FICA contribution goes toward Social Security programs, including retirement, disability, survivors, and children’s benefits. Qualified retirees and people who are disabled can use these benefits as their partial income. This federal benefits program may also go to the children of beneficiaries.

The government designed Social Security as a way for current employees to support current retirees’ and other beneficiaries’ benefits. When employees and employers pay into this system, they eventually get to reap the benefits later on in life. It’s a way for the workforce to provide retirement funds for all employees.

You need to submit the IRS Form 941 (The Employer’s Quarterly Federal Tax Return) to report your business’ contributions to Medicare and Social Security. At the end of the year, you typically must send each employee a W-2 that outlines their annual wages and taxes withheld.

You may also need to report to your employees how much you’re withholding on each of their paychecks, including how much you’re withholding from the current paycheck and the total FICA tax you’ve withheld for the year to date.