How Social Security Contributions Work: A Guide for Employees and Self-Employed

Social Security -The Federal Insurance Contributions Act (FICA) is a U.S. law designed to collect payroll taxes that fund programs like Social Security and Medicare. While the name may sound technical, it plays a crucial role in ensuring that millions of people receive benefits such as retirement and disability assistance.

How FICA Works

For most employees, FICA requires employers to withhold a portion of their paycheck, which is then allocated to Social Security and Medicare. If you’re self-employed, things work a bit differently: you are responsible for paying the full tax amount but can deduct half of it when filing your taxes.

Breakdown of FICA Contributions

If you’re employed, your employer will deduct 7.65% of your salary for FICA, which covers both Social Security and Medicare. For self-employed individuals, this rate increases to 15.3%, as you are responsible for both the employee and employer portions of the tax.

For example, if you earn $2,000 a month, 15.3% of that would be $306. If you are employed, you would pay half of that amount ($153), and your employer would pay the other half. Of the total $306, $248 goes to Social Security, and $58 goes to Medicare. For self-employed individuals, the full $306 is due, but remember, you can deduct half ($153) when filing your taxes.

Social Security and Medicare Contributions

FICA has two main components:

• Social Security Tax (6.2%): This tax is used to fund Social Security benefits. However, only income up to a certain limit is subject to the Social Security tax. In 2024, this limit is $168,600. Any income beyond that is not taxed for Social Security purposes.
• Medicare Tax (1.45%): Unlike Social Security, there is no income limit for Medicare tax. However, higher earners pay an additional 0.9% Medicare tax. This applies to:
  • Singles earning over $200,000
  • Married couples filing jointly earning over $250,000
  • Married couples filing separately earning over $125,000 each

For high earners, the total Medicare tax rate increases to 2.35%.

Why It Matters

FICA is essential for funding programs that support millions of Americans, including retirees, people with disabilities, and those who need medical coverage through Medicare. While the taxes may feel burdensome, they ensure that critical benefits remain available for those in need.

So, while you may not notice FICA in your paycheck, it’s working behind the scenes to support vital programs that millions rely on. If you’re self-employed, be mindful of the additional tax burden, but remember you can reduce it when filing taxes.