What is the FICA Tax?

The Federal Insurance Contributions Act (FICA) tax is a U.S. payroll tax that funds Social Security and Medicare programs. It requires employers and employees to each contribute a percentage of an employee's wages or salary to these programs. As of 2021, the FICA tax rate is 7.65%, with 6.2% going to Social Security and 1.45% going to Medicare. For employees, the employer withholds the FICA tax from their paycheck and then matches their contribution by paying the same amount themselves. Self-employed individuals are responsible for paying the full FICA tax themselves.

Some business owners elect to tax their business as an S-Corporation, which can avoid FICA taxes on some business income. Unlike sole proprietorships and partnerships, which are subject to self-employment taxes, including FICA, on all profits, S-Corp shareholder-employees can take a reasonable salary as W-2 wages, which are subject to FICA payroll taxes, and then take additional profits as distributions, which are not subject to self-employment taxes.