Who doesn’t love talking about taxes? Alright, we know that’s probably not many of you, but even still, this doesn’t change the fact that taxes are something that we all interact with on a daily basis. With this said, there’s a difference between interacting with something and understanding it. For many of us, we know generally what taxes are and what they do, but we may not have an in-depth understanding of taxes beyond that. A more in-depth understanding of taxes can be especially helpful in scenarios where you may be starting a business, as you may be entering an environment where you’re intersecting with taxes in a different way. A more all-encompassing understanding of taxes isn’t easy to achieve, however.
At Payday HCM, we’re very aware of both the importance of understanding taxes as a new business owner, as well as the confusing nature of taxes that can make achieving this understanding difficult. We have plenty of clients who ask us a whole assortment of questions that relate to taxes, whether it be tax rates or clarification on what taxes they’re expected to pay. One set of taxes that we’re all likely familiar with but may not entirely understand is FICA taxes. In fact, what does FICA actually mean, and what taxes are FICA taxes?
Well, in this article, we’ll be going over four commonly asked questions about FICA taxes. We’ll start by generally dissecting what FICA is and, by extension, what FICA taxes are. From there, we’ll dive into the differences between FICA taxes and federal income tax before covering whether 401(k) contributions are subject to FICA taxes. By the end of this article, you’ll have a much clearer idea of what FICA taxes are and how they work.
In this article, you will learn:
What is FICA?
First up on the list is probably the most commonly asked question when it comes to FICA (but also arguably the most important): What is FICA?
The History of FICA
FICA refers to the Federal Insurance Contributions Act, which was passed in 1953. Initially, FICA was set up to solely fund the newly established Social Security benefits program created by President Franklin D. Roosevelt’s administration. When Medicare was signed into law in 1965 by President Lyndon B. Johnson, it added the payroll tax to fund Medicare.
At first, the payroll tax introduced by FICA wasn’t considered a tax, but a contribution. President Franklin D. Roosevelt intended the program to be funded by workers and exist outside of government revenue for fear of misuse. As time went on, and the scope of Social Security became broader and FICA included Medicare, these contributions would be more colloquially referred to as a payroll tax.
FICA Taxes
The total FICA tax rate is 15.3 percent. This is split up between employer and employee contributions. For employees, Social Security tax withholding is set at 6.2 percent, while Medicare tax withholding is set at 1.45 percent. Employers withhold a matching percentage contribution for both Social Security and Medicare taxes.
An employer takes out, or withholds, these percentages from an employee’s wages each paycheck (hence the reason why FICA taxes are referred to as payroll taxes). The Social Security tax also features a wage base limit—essentially, the maximum amount in wages earned that will be required to withhold this tax. For 2025, the Social Security wage base limit is $171,600.
The Medicare tax has no wage base limit. In fact, the Medicare tax actually has a wage threshold where, once surpassed, there is an increased contribution percentage. Individuals with wages over $200,000 or married couples filing jointly with wages over $250,000 will withhold an additional 0.9 percent. This additional contribution helps to fund certain Affordable Care Act tax credits.
FICA Exemptions and Federal Income Taxes
In this section, we’ll answer two more frequently asked questions surrounding FICA taxes: Are there any exemptions from paying FICA taxes, and are FICA taxes the same as federal income taxes?
Who Is Exempt From FICA Taxes?
Generally speaking, most wages are subject to FICA tax withholding. There are a few exemptions that exist, however. Exemptions for FICA taxes include:
- Members of qualifying religious groups formed after 1950 that are opposed to accepting Social Security benefits.
- Temporary nonresident aliens, including some international students or scholars, or those with specific visa requirements.
- Students working for a university they are enrolled at whose employment is dependent on their enrollment.
- Foreign government employees or certain U.S. government employees with comparable pension plans.
The groups that are exempt from FICA tax withholding are relatively specific, so if you aren’t sure whether you’re exempt or not, it’s likely that you are not. For members of a qualifying religious group, you must submit a Form 4029 to be exempt.
Is FICA the Same as Federal Income Tax?
Now, it’s easy to get FICA taxes mixed up with the federal income tax—after all, FICA taxes are, technically, a federal income tax. However, FICA taxes are not the same as the federal income tax. Making this distinction is easier when you think of FICA taxes as the Social Security and Medicare taxes, as those are more easily distinguishable from the federal income tax.
The federal income tax is kind of like the main tax in a sense, or, at the very least, probably the closest thing to our general idea of what taxes are. It’s the U.S. government’s main source of revenue and helps to fund all sorts of different government programs and activities. It’s levied on a progressive tax system, meaning higher earners are taxed at different rates.
FICA Taxes and 401(k) Contributions
Finally, we’ll go over how FICA taxes affect 401(k) contributions, mainly whether or not 401(k) contributions are subject to FICA taxes.
Are 401(k) Contributions Subject to FICA Taxes?
If you’ve ever looked into different retirement savings plans, whether that be a 401(k) or IRA, you’ve likely compared the different rules around contributions and how those contributions are taxed. Even still, it can be somewhat unclear whether or not 401(k) contributions are actually subject to things like FICA taxes.
If you have a traditional 401(k) offered through your employer, this means your 401(k) contributions are pre-tax. This means that you contribute to your 401(k) with wages before taxes are taken out; you’d then pay the appropriate taxes when withdrawing from the 401(k). However, this only applies to federal income tax: even pre-tax 401(k) contributions are still subject to FICA taxes.
These 401(k) contributions are not subject to the federal income tax, though, until the funds are withdrawn. If you have a post-tax contribution set up, otherwise known as a Roth, this means your contributions will already be taxed upon being contributed. This includes both FICA taxes and federal income tax.
Employer 401(k) Contributions and FICA Taxes
If you have a 401(k) plan through your employer, it’s also likely that your employer makes contributions to your 401(k) alongside your own contributions. These contributions, regardless of whether the 401(k) is set up to take contributions pre-tax or post-tax, also have their own rules when it comes to FICA taxes.
In fact, employer 401(k) contributions are actually tax-deductible, meaning employers won’t pay FICA, federal income tax, or FUTA taxes on their 401(k) contributions. However, if you have a traditional 401(k) that is contributed to with pre-tax contributions, you may be subject to paying tax on the total amount of the 401(k), including employer contributions, upon withdrawal.
Mastering the Ins and Outs of FICA Taxes
To say taxes can be confusing would be a pretty big understatement. On the surface, they’re relatively straightforward. The deeper you look, however, and the more you try to understand what things are taxed and what aren’t, the kinds of taxes there are, and all of the different acronyms and abbreviations there are, the more you’ll likely find yourself staring blankly at your computer screen in confusion. It’s no different when it comes to FICA taxes. Although we pay them each paycheck, knowing exactly what they are and what they apply to isn’t always easy. Luckily, with the information provided in this article, you’ll have the knowledge you need to start your journey toward becoming a tax expert.
Curious to venture deeper down the tax rabbit hole? Probably not, but in any case, understanding what taxes you pay both as an individual and a business is crucial information (even if not always the most interesting). In fact, FICA is only one component of the totality of employer taxes. Check out our article for a complete breakdown of employer taxes to acquire a better understanding of all the taxes associated with employing others and running a business.
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