Every small business owner gets overwhelmed by taxes when they're first starting out, so you're not alone. Between the accounting jargon and acronyms, the IRS doesn't make it simple or easy for us entrepreneurs.
FICA taxes fall into that “confusing” bucket. You look at an employee's gross pay, then see FICA withheld, and realize you're also paying a matching amount out of your own pocket.
Here's what FICA actually is, how it works, and what it means for your payroll budget.
What Is FICA Tax?
No, FICA doesn't stand for Fighting Insane Costs All-the-time. FICA stands for the Federal Insurance Contributions Act. It's a federal payroll tax that funds Social Security and Medicare programs. Both you and your employees contribute to FICA through payroll withholding. The current FICA tax rate is 15.3% total, split evenly between employer and employee. That breaks down to 12.4% for Social Security and 2.9% for Medicare.
When you hire someone, you withhold 7.65% from their paycheck for FICA taxes, and then you pay an additional 7.65% from your business funds. That's the matching contribution employers are required to make.
Breaking Down the Two Parts of FICA
FICA isn't one single tax. It's two separate taxes bundled together on your payroll reports.
Social Security Tax
The Social Security portion is 6.2% for employees and 6.2% for employers, totaling 12.4%. This tax funds retirement benefits, disability benefits, and survivor benefits for workers and their families.
Social Security tax only applies to wages up to a certain limit, called the wage base. For 2025, that limit is $176,100. Any wages you pay an employee above that amount in a calendar year are not subject to Social Security tax. An employee earning $176,100 or more would contribute a maximum of $10,918.20 to Social Security in 2025, and the employer would match that exact amount.
Medicare Tax
The Medicare portion is 1.45% for employees and 1.45% for employers, totaling 2.9%. This tax funds healthcare coverage primarily for individuals aged 65 and older and certain people with disabilities.
Unlike Social Security, Medicare tax has no wage base limit. All covered wages are subject to Medicare tax, no matter how much an employee earns. If you pay someone $500,000 a year, Medicare tax applies to every dollar of it.
The Additional Medicare Tax You Need to Know About
High-earning employees face an additional 0.9% Medicare tax on wages exceeding $200,000 in a calendar year. Employers are required to withhold this additional tax once an employee's wages cross that threshold, regardless of the employee's filing status.
The important part here is that there is no employer match for the Additional Medicare Tax. You withhold it from the employee's paycheck and send it to the IRS, but you don't contribute anything extra yourself. It's entirely on the employee.
How to Calculate FICA Taxes
The math is straightforward once you know the rates and limits. Here's the process:
Take the employee's gross wages for the pay period. Multiply by 7.65% to get the total FICA withholding amount (6.2% Social Security + 1.45% Medicare). Withhold that amount from the employee's paycheck. Match it dollar for dollar from your business funds. Deposit both portions with the IRS according to your deposit schedule.
Example: An employee earns $4,000 in a pay period. You withhold $306 from their paycheck ($4,000 x 7.65%). You contribute another $306 from your business. Total FICA taxes deposited: $612.
If that same employee has earned $180,000 year to date, they've already exceeded the Social Security wage base of $176,100. For this pay period, you'd only withhold and match the 1.45% Medicare portion, not the full 7.65%.
What About Self-Employed Business Owners?
Self-employed individuals pay both the employee and employer portions of FICA tax through what's called the Self-Employment Contributions Act (SECA) tax. This means self-employed people are taxed at the full 15.3% rate: 12.4% for Social Security on earnings up to $176,100 in 2025, plus 2.9% for Medicare on all earnings.
The one benefit is that self-employed individuals can deduct the employer-equivalent portion of the self-employment tax when calculating adjusted gross income. It doesn't eliminate the tax, but it reduces the overall tax burden slightly.
If you're an S-Corp owner paying yourself a salary, you're back in the regular FICA system. You withhold and match just like any other employer-employee relationship, but only on the amount of your “reasonable salary“. The rest of your distributions and owner compensation avoids the FICA system, which is why an S-Corp is so valuable.
FICA Exemptions Worth Knowing
Not every type of worker is subject to FICA taxes. Foreign students temporarily in the United States in F-1, J-1, or M-1 status for less than five calendar years may be exempt from FICA tax on wages paid for services performed in the United States.
Independent contractors are also exempt, though that exemption exists because they're responsible for their own self-employment taxes instead. That means you don't have to withhold or match FICA for 1099 contractors.
The Real Cost of Hiring Employees
When you're budgeting to hire someone, remember that the employee's salary is only part of what you'll actually pay. FICA adds 7.65% on top of gross wages before you even consider unemployment taxes, workers' compensation, benefits, or any other employment costs.
A $50,000 salary actually costs you $53,825 once you factor in your FICA match. That gap matters when you're planning headcount or trying to figure out if you can afford to hire.
How Payroll Software Handles FICA
Good payroll software calculates FICA withholding automatically, tracks year-to-date earnings against the Social Security wage base, handles the Additional Medicare Tax threshold, and deposits the taxes on the correct schedule without you manually tracking IRS deadlines.
For small business owners, this eliminates one of the most common sources of payroll errors. Missing a FICA deposit or miscalculating withholdings triggers IRS penalties that add up quickly. The software removes that margin for error entirely.
I've been using Gusto for years and it's kept me sane on exactly this issue. It handles all the FICA calculations, withholdings, and deposits automatically, whether you're an S-Corp owner processing your own salary or managing a larger team with employees crossing wage base thresholds mid-year. The peace of mind that comes from knowing your payroll taxes are filed correctly and on time is worth far more than the monthly subscription cost.
Tax rates and wage base limits are subject to annual adjustment. Always verify current rates with the IRS or your payroll provider.
