What Are FICA Taxes and What Do They Pay For? Explained

Every time you get a paycheck or run payroll for your employees, there’s a line item that shows up like clockwork: Federal Insurance Contributions Act (FICA). It might look like just another government deduction but it’s actually a cornerstone of the U.S. social safety net. 

Knowing how FICA works is essential. For employees, understanding FICA means recognizing how today’s paycheck deductions support tomorrow’s financial security. For employers, it’s about more than just ticking a box. It’s about navigating payroll costs, staying compliant with federal requirements, and managing business finances wisely.

Ignoring or misunderstanding FICA can lead to costly mistakes, from unexpected tax bills to compliance penalties.

That’s why it’s essential to get a clear handle on how it works. So, what are FICA taxes and what do they pay for?

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What are FICA Taxes?

FICA taxes, short for the Federal Insurance Contributions Act, are federal payroll taxes that both employees and employers are required to pay. These taxes fund two major United States government programs: Social Security and Medicare, the backbone of the nation’s retirement and healthcare systems.

Unlike federal income tax, which varies based on income level and personal deductions, FICA taxes are flat-rate and apply to earned wages. That means whether someone earns $30,000 or $130,000 a year, they’ll pay the same percentage up to a certain wage cap.

Here’s how it breaks down:

• Social security tax: This portion helps provide income for retirees, people with disabilities, and surviving family members of deceased workers. Both the employer and the employee pay 6.2% on wages up to the annual limit ($168,600 in 2024).
  
  
• Medicare tax: This supports hospital insurance for people 65 and older and certain younger individuals with disabilities. Both the employer and the employee pay 1.45%, with no wage limit. Employees who earn more than $200,000 in a year are also subject to an additional 0.9% Medicare surtax, which the employer does not match.
  
  

Together, these make up the FICA tax rate:

• 7.65% from the employee’s paycheck
  
  
• 7.65% paid by the employer
  
  
• Total: 15.3% per employee

So, when you see “FICA” on a pay stub, it’s not just another deduction. It’s a shared investment in the country’s long-term financial and healthcare security. And for employers, it’s a mandatory contribution that plays a significant role in payroll tax planning.

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Who Pays FICA Taxes?

FICA taxes aren’t just a burden for employees or employers, they’re a shared responsibility. The law requires both parties to contribute equally to fund the nation’s Social Security and Medicare programs. 

Whether you’re a full-time employee, a small business owner, or self-employed, understanding who pays what and when is crucial for staying compliant and financially prepared.

• Employees: Have FICA taxes withheld directly from their paycheck.
  
  
• Employers: Must match the amount withheld from employees’ wages.
  
  

For self-employed individuals, the entire FICA tax called the Self-Employment Tax falls on their shoulders, since they’re considered both the employer and the employee.

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What Are the Current FICA Tax Rates?

As of 2024, FICA taxes are made up of two components:

FICA Component

Employee Pays

Employer Pays

Total

Social Security

6.2%

6.2%

12.4%

Medicare

1.45%

1.45%

2.9%

Total FICA Rate

7.65%

7.65%

15.3%

There are a few additional details to keep in mind:

• Social Security wage cap: Only the first $168,600 of an employee’s wages (2024 limit) are subject to the 6.2% Social Security tax.
  
  
• Additional Medicare tax: Employees earning over $200,000 annually are subject to a 0.9% Medicare surtax, but employers don’t match this.
  
  

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What Do FICA Taxes Pay For?

Now, let’s answer the heart of the question: What are FICA taxes and what do they pay for?

Your FICA taxes go directly to fund two foundational programs that millions of Americans rely on:

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1. Social Security

The Social Security portion of FICA taxes funds:

• Retirement Benefits: Paid monthly to individuals 62 and older who have worked and paid into the system for at least 10 years.
  
  
• Disability Insurance (SSDI): Provides income to people unable to work due to disability.
  
  
• Survivors Benefits: Financial support to spouses, children, or dependents of deceased workers.
  
  
• Dependent Benefits: Available to some family members of disabled or retired workers.
  
  

When you or your employees pay Social Security tax, you're essentially contributing to an insurance program that protects against loss of income due to retirement, disability, or death.

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2. Medicare

The Medicare portion of FICA taxes funds:

• Hospital Insurance (Part A): Covers hospital stays, nursing care, hospice, and some home health services.
  
  
• Supplemental Coverage: Although not fully covered by FICA taxes, contributions help sustain other Medicare parts that provide outpatient care and medical supplies.
  
  

This tax ensures that Americans aged 65 and older or younger individuals with certain disabilities have access to essential medical care, regardless of income or work status.

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FICA and Employers: What You Need to Know

As an employer, FICA taxes directly affect your payroll costs and tax reporting. Here’s what you need to stay on top of:

• Withhold FICA taxes from each paycheck
  
  
• Match the employee’s contribution
  
  
• Report totals on quarterly Form 941
  
  
• Issue annual W-2s with total FICA withheld
  
  

And if you're in a tipped industry, there's more...

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Tip Alert: Employers Pay FICA on Tips, Too

If you own or manage a restaurant, bar, or other service-based business, here’s a key detail: You’re responsible for paying FICA taxes on your employees’ reported tips, even though that income didn’t come from your pocket.

Fortunately, there’s help in the form of the FICA Tip Credit (IRS Code §45B), which allows you to claim a credit for the employer portion of FICA taxes paid on tips. You can even go back up to three years to claim what’s rightfully yours.

Want help claiming it? [Start your free eligibility check]

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FICA vs. Other Payroll Taxes

FICA is often confused with other types of taxes, like:

• Federal Income Tax: Based on employee income level and filing status
  
  
• FUTA (Federal Unemployment Tax Act): Paid only by employers to fund unemployment benefits
  
  
• State Taxes: Vary by location and may include income, disability, or unemployment taxes
  
  

FICA is distinct in that it funds federal social insurance programs and is non-negotiable for most employers and workers.

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Turn Payroll Deductions Into Business Advantages 

So what are FICA taxes and what do they pay for? They’re more than just a payroll line item. They’re a vital source of funding for two of the most critical federal programs in the U.S.: Social Security and Medicare.

Every time you or your employees contribute to FICA, you’re building a foundation for retirement security, disability protection, and access to healthcare in later life. As an employer, understanding and managing your FICA obligations is key to staying compliant and protecting your business.

And if you’re in a tipped industry, you may be eligible to get some of that money back through the FICA Tip Credit. Thousands of businesses are already claiming these refunds. Shouldn't you?

Check My FICA Tip Credit Eligibility

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