How FICA and Income Tax Affect Your Take-Home Pay

If you’ve ever had a job and taken a look at your paystub, you’ve probably noticed a line for FICA taxes. The Federal Insurance Contributions Act (FICA) is a law that states that taxes should be withheld from employees’ paychecks to be used for Social Security and Medicare. It is part of payroll taxes that everyone who earns income is responsible for paying. 

What is payroll tax? 

Payroll taxes are withheld from your income before it is paid to you. Your employer pays the government this tax on your behalf. The tax is calculated based on a percent of your wages, salaries, and tips. FICA is a payroll tax, as is withholding tax. 

What is withholding? 

Your employer withholds an amount from your paycheck and pays directly to the government for payroll taxes. This money is calculated based on Form W-4 that you fill out when you start a new job, go through a major life event, or if the tax laws change.  

How much is FICA tax? 

FICA is made up of two payroll taxes: Social Security tax and Medicare tax. 

As an employee, 7.65% of your earned income will go to pay FICA taxes. Your employer pays an additional 7.65% on your behalf.  

If you are self-employed, you do not have an employer to share the cost of FICA with you. So, you will be responsible for paying 15.3% at tax time. To avoid a large amount due on your return, you can pay quarterly estimated payments.  

What is Social Security Tax? 

Social Security tax is paid by both employers and employees to pay for the Social Security program. Millions of Americans benefit from this program every year.  Social Security helps provide income for retirement, disability, and survivorship.  The rate in 2021 is 12.4%. This is shared between employers and employees. Make sure to check your withholdings because this tax is automatically withheld if you are a W-2 employee. 

What is Medicare Tax? 

Like Social Security, Medicare is a government program that is funded by taxes. This program provides insurance to senior citizens. Medicare tax is paid by everyone who earns income. The rate in 2021 is 2.9% which is split between employer and employee. 

What are federal income taxes? 

Federal income tax is paid in addition to your FICA taxes (most U.S. states have a separate state income tax, too). As an employee, you should have federal income tax automatically withheld from your paycheck all year long. The total amount of income tax you pay depends on how much you earn and your tax filing status.  

What is progressive tax?  

Generally, progressive tax means the more income you earn, the more tax you will pay. a The United States has a progressive tax system that uses tax brackets to determine how much income tax a person should pay. Income that falls in the lowest tax bracket is taxed at the lowest rate. Any income that exceeds that threshold gets taxed at a higher rate.  

What is flat tax? 

Flat tax is a tax that is the same for everyone regardless of their income bracket. Sales tax is an example of a flat tax. Everyone who lives in the same county will pay the same amount of sales tax as set by their area.