How Payroll Taxes Work: FICA, Medicare, and Self-Employment Tax

What Payroll Taxes Are

Every paycheck includes deductions for FICA — the Federal Insurance Contributions Act taxes. FICA funds two programs:

1. Social Security (Old-Age, Survivors, and Disability Insurance — OASDI): The program that provides retirement, survivor, and disability benefits to eligible workers and their families.
2. Medicare (Hospital Insurance — HI): The federal health insurance program primarily for people 65 and older and certain disabled individuals.

FICA is a shared tax: employees and employers each contribute to it. Understanding the structure clarifies how much of total compensation goes to payroll taxes and why the self-employed pay a larger combined rate.

The FICA Structure for W-2 Employees

Social Security Tax (6.2%)

The Social Security portion of FICA applies at a rate of 6.2% for both the employee and the employer — a combined rate of 12.4%. However, it applies only to wages up to an annual wage base, after which no further Social Security tax is owed for that year.

For 2026, the Social Security wage base is $184,500. An employee earning $200,000 will pay SS tax only on the first $184,500 of wages.

Employee SS Tax = min(Annual Wages, $184,500) × 6.2%
Employer SS Tax = min(Annual Wages, $184,500) × 6.2%

Medicare Tax (1.45%)

The Medicare portion applies at 1.45% for both employee and employer with no wage base cap. Every dollar of wages is subject to Medicare tax.

Employee Medicare Tax = Annual Wages × 1.45%
Employer Medicare Tax = Annual Wages × 1.45%

Additional Medicare Tax (0.9%)

The Affordable Care Act introduced an Additional Medicare Tax of 0.9% on higher earners. The thresholds depend on filing status:

This tax is an employee-only levy — there is no employer match. The employer is required to withhold it once wages exceed $200,000 in a calendar year, regardless of filing status. If the couple’s combined income triggers the threshold but neither individual crosses $200,000, they reconcile on Form 8959 at tax time.

Additional Medicare Tax = max(0, Annual Wages − Threshold) × 0.9%

A Worked Example

Consider a W-2 employee earning $85,000 per year, filing as single.

Social Security wage base check: $85,000 < $184,500 → full wages are subject to SS tax.

Employee Social Security Tax: $85,000 × 6.2% = $5,270.00

Employee Medicare Tax: $85,000 × 1.45% = $1,232.50

Additional Medicare Tax: $85,000 < $200,000 threshold → $0

Total Employee FICA: $5,270 + $1,232.50 = $6,502.50

Total Employer FICA: mirrors the employee amounts (no Additional Medicare Tax for employers): $5,270 + $1,232.50 = $6,502.50

Combined FICA: $13,005.00

This employee contributes $6,502.50 to FICA from their own paycheck. Their employer contributes another $6,502.50 on top of the wages paid. Total FICA cost for both sides: $13,005 on $85,000 of wages.

Self-Employment Tax: Paying Both Halves

Self-employed individuals — sole proprietors, single-member LLCs, independent contractors — do not have an employer to pay the matching 6.2% SS and 1.45% Medicare. Instead, they pay Self-Employment (SE) Tax, which covers both the employee and employer halves.

The combined SE tax rates are:

• 12.4% on net self-employment earnings up to the SS wage base
• 2.9% on all net self-employment earnings (Medicare, no cap)
• 0.9% Additional Medicare Tax above the relevant threshold (same rules as W-2)

The 92.35% adjustment: SE tax does not apply to the full net earnings of a self-employed person. Instead, it applies to 92.35% of net earnings (the SE adjustment factor, 1 − 0.0765 ≈ 0.9235). This approximates the amount an employee would earn after the “employer” share — since employees only pay FICA on wages received, not on the employer’s share of FICA paid on their behalf.

SE-Adjusted Wages = Net SE Income × 0.9235
SS Tax = min(SE-Adjusted Wages, SS Wage Base) × 12.4%
Medicare Tax = SE-Adjusted Wages × 2.9%
Total SE Tax = SS Tax + Medicare Tax

SE Half-Deduction

Self-employed taxpayers can deduct 50% of SE tax from gross income on Schedule 1 of Form 1040. This deduction approximates the employer’s half, which would be deductible as a business expense if the business were structured as an employer.

Effective FICA Rate

The effective FICA rate for W-2 employees — employee share only — declines as income rises above the Social Security wage base, because the 6.2% SS component stops applying. An employee earning $250,000 pays the same $11,439 in SS tax as one earning $184,500, but pays an increasing Medicare share including the 0.9% Additional Medicare Tax above $200,000.

At $85,000 wages (employee only): $6,502.50 ÷ $85,000 = 7.65% effective FICA rate.

At $250,000 wages (employee, single filing):

• SS: $184,500 × 6.2% = $11,439
• Medicare: $250,000 × 1.45% = $3,625
• Additional Medicare: ($250,000 − $200,000) × 0.9% = $450
• Total = $15,514 → effective rate ≈ 6.21%

The 2026 Social Security Wage Base

The Social Security wage base adjusts annually based on changes in average national wages. For 2026, the limit is $184,500, up from $176,100 in 2025. Wages above this limit in a calendar year are exempt from the 6.2% SS rate; Medicare continues with no cap.

For self-employed workers, the SE adjustment means the effective SS base is $184,500 ÷ 0.9235 ≈ $199,784 of gross SE income before the adjusted earnings reach the SS wage base.

What FICA Funds

It is worth understanding what these taxes buy:

• Social Security pays retirement benefits (starting as early as age 62, with full benefits at 67 for those born after 1960), survivor benefits for minor children and surviving spouses, and disability benefits for workers who become unable to work before retirement.
• Medicare Part A (funded by Medicare FICA) covers hospital stays, skilled nursing facility care, and some home health care. Workers need 40 quarters (10 years) of FICA-covered employment to qualify for premium-free Medicare Part A at 65.

FICA is not a savings account — current workers fund current retirees and beneficiaries under a pay-as-you-go structure.

Summary

FICA payroll taxes consist of Social Security (6.2% employee + 6.2% employer, up to the $184,500 2026 wage base), Medicare (1.45% each, no cap), and the Additional Medicare Tax (0.9% employee-only above $200,000 for single filers). Self-employed individuals pay both halves as SE tax, applied to 92.35% of net SE income, and may deduct half the SE tax from gross income.

For the worked example — $85,000 wages, W-2 employee, single — total employee FICA is $6,502.50 ($5,270 SS + $1,232.50 Medicare), matched equally by the employer.

Use the payroll tax calculator to see your exact FICA breakdown.

This guide reflects 2026 FICA rates and wage base. Tax rules change annually. This is educational content, not tax advice.