Learn what FICA tax is, how to calculate it, who pays, and which wages are exempt. Covers Social Security, Medicare, 401(k) tax rules, and payroll basics.
You may be overpaying your payroll taxes without even realizing it.
Every time you run payroll, your business pays a matching share of your employees’ Social Security and Medicare taxes, whether they’re earning hourly wages, salaries, commissions or even customer tips. For many employers, these taxes are just another line item in the payroll process.
It’s called the FICA tax, and it applies to nearly every dollar earned by your regular employees. That includes base wages, overtime, bonuses and yes, even tips. You’re responsible for contributing 7.65 percent of each employee’s taxable wages to the government, on top of what they earn.
However, qualifying employers in the food and beverage industry, including restaurants, bars, and hospitality businesses, may be eligible for significant savings thanks to the FICA Tip Credit. The IRS may owe you thousands of dollars back on those taxes if you know how to claim them.
FICA stands for the Federal Insurance Contributions Act, which is a federal payroll tax that shows up on every paycheck and is split between you (the employer) and your W-2 employees, a traditional or regular employee who is on your payroll.
The FICA tax rate is applied to all taxable compensation, including:
For detailed guidance, refer to IRS Publication 15-B, which includes a chart outlining which fringe benefits are subject to FICA taxes and which are exempt (see Table 2-1 on page 6).
Also, keep in mind that employee contributions to retirement plans, such as 401(k)s, are still subject to FICA taxes, even though they may be excluded from federal income tax.
FICA funds two major social programs that support millions of Americans:
When you and your employees pay FICA, you're funding these programs, which serve over 180 million workers in the United States.
Both the employer and employee are responsible for paying:
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Note: High earners pay an additional 0.9% Medicare surtax on wages exceeding $200,000; however, only employees pay this tax, not employers.
Let’s say you run payroll for an employee who earns $1,000 in a week:
That’s $153 in FICA taxes just for one employee that week, and this repeats every week, for every W-2 worker on payroll.
Now imagine the numbers across your entire staff and year after year. It adds up.
As an employer, you’re responsible for collecting and submitting FICA taxes on behalf of both your business and your employees. This isn’t optional. It’s part of your legal payroll obligations.
Every time you run payroll, you must:
Once received, the IRS allocates those funds:
FICA might look like just another tax line on a paycheck, but it's how nearly every American earns credit toward Social Security and Medicare coverage.
FICA tax follows a fixed percentage applied to eligible compensation. Getting this right ensures your payroll is both accurate and compliant.
FICA applies to most taxable income, including:
Even if certain amounts are exempt from income tax, they may still be subject to FICA withholding.
For 2025, the Social Security tax only applies to the first $176,100 of an employee’s wages. Anything above that is not taxed for Social Security, but the Medicare tax continues to apply with no income cap.
Here’s how it breaks down:
As the employer, you must match the exact amount of FICA tax withheld from each employee. If your employee pays $153 in FICA taxes this pay period, your business pays an additional $153 as well.
This dollar-for-dollar match is what often surprises business owners because your real payroll costs are higher than just base wages.
While most employee compensation is subject to FICA taxes, there are several situations where FICA withholding is not required. Understanding these exemptions can help employers stay compliant while potentially reducing payroll tax liability.
It's important to note that FICA exemption rules can vary by state and are subject to specific IRS definitions and conditions. What qualifies in one setting may not apply in another, so always consult IRS publications or a payroll professional to confirm eligibility.
Below are some of the most common FICA exemptions employers should be aware of.
FICA might be a mandatory part of payroll, but that doesn’t mean you’re stuck paying more than you should. If your business operates in food service, hospitality or any industry where tips are part of the equation, you may be eligible to claim back thousands in overpaid taxes.
You’ve already done the hard part: Employing staff, running payroll and reporting income. Now it’s time to see if the IRS owes you something in return.
At Anchor Accounting Services, we help qualifying businesses:
If you qualify, we’ll handle the paperwork, filings and follow-up so you can focus on running your business.
Don’t leave money on the table. Start your free FICA review today.
[Start My Free Eligibility Check]
No, FICA is separate from federal income tax. FICA taxes fund Social Security and Medicare programs, while federal income tax goes into the general federal budget and supports a broad range of government services. Both are withheld from employee paychecks, but they serve different purposes and follow other rules.
FICA taxes are used to fund two key federal programs:
When you and your employees pay FICA taxes, you're contributing directly to these safety net programs.
Yes, 401(k) contributions are subject to FICA tax. While employee contributions to a 401(k) plan are exempt from federal income tax, they are not exempt from FICA. That means Social Security and Medicare taxes must still be withheld on those earnings, even though income tax is deferred.
The total FICA tax rate is 15.3 percent, split evenly between the employee and the employer:
Employees have 7.65 percent withheld from their wages, and employers contribute a matching 7.65 percent. High earners may pay an additional 0.9 percent Medicare tax on income above $200,000, but that additional amount is paid by the employee only.
You’ve already done the work, served the guests, paid the taxes and reported the tips.
Now, let our full-service FICA Tip Credit Program handle the rest. No upfront cost. No red tape. Just results.
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