What is FICA?

FICA (Federal Insurance Contributions Act) is the federal payroll tax that funds Social Security and Medicare, paid by both employees and employers. For professional service firms, FICA consists of Social Security tax (6.2% employee + 6.2% employer = 12.4% total) and Medicare tax (1.45% employee + 1.45% employer = 2.9% total). Total FICA is 15.3%, split equally between the employee and the employer. An employee earning $100,000 pays $7,650 in FICA withholding; the employer pays an additional $7,650 in matching contributions. Self-employed individuals pay both portions (15.3%) as self-employment tax.

Key characteristics of FICA

• Social Security: 12.4% total (6.2% each) on wages up to $160,200 (2023)

• Medicare: 2.9% total (1.45% each) on all wages, no cap

• Additional Medicare: 0.9% on wages over $200,000 (employee only, no employer match)

• Employee portion: Withheld from paychecks

• Employer portion: Paid by the company, not deducted from employee pay

Why fica matters for service firms

FICA represents a significant labor cost beyond wages. A consulting firm with a $2M annual payroll pays $153,000 in employer FICA, increasing the actual labor cost by 7.65% beyond gross salaries. For owners, FICA/self-employment tax drives entity structure decisions: S-Corp owners pay FICA only on salary, avoiding it on distributions; sole proprietors pay self-employment tax (FICA equivalent) on all business income. A $300,000 income stream saves $27,000+ annually in FICA taxes through an S-Corp election. FICA is unavoidable for W-2 wages, but can be legally minimized through entity structure optimization.

Example: FICA calculation and employer cost impact

Employee payroll calculation:

• Annual salary: $120,000

• Bi-weekly gross pay: $4,615.38

Employee FICA withholding:

• Social Security (6.2%): $286.15

• Medicare (1.45%): $66.92

• Total employee FICA: $353.07

• Federal income tax withholding: $650.00

• State income tax withholding: $185.00

• Net pay: $3,427.31

Employer FICA match:

• Social Security (6.2%): $286.15

• Medicare (1.45%): $66.92

• Total employer FICA: $353.07

True employer cost:

• Gross wages: $4,615.38

• Employer FICA: $353.07

• Total cost per pay period: $4,968.45

Annual employer cost:

• Gross wages: $120,000

• Employer FICA: $9,180 (7.65%)

• Employer FUTA/SUTA: $1,800

• Total yearly cost: $130,980

Comparison: Owner compensation strategies

Strategy 1: W-2 employee (regular employment)

• Salary: $120,000

• Employee FICA: $9,180 (withheld)

• Employer FICA: $9,180 (company pays)

• Total FICA: $18,360

Strategy 2: S-Corp owner (same $120,000 total compensation)

• W-2 salary: $70,000 (reasonable compensation)

• Distribution: $50,000

• Employee FICA on salary: $5,355

• Employer FICA on salary: $5,355

• FICA on distribution: $0

• Total FICA: $10,710

• FICA savings: $7,650 annually

Strategy 3: Sole proprietor (same $120,000 income)

• Net business income: $120,000

• Self-employment tax (15.3%): $18,360

• (Note: Calculated on 92.35% of income = $110,820 × 15.3% = $16,955)

• No FICA savings available

Key insight:

• S-Corp saves FICA on distributions, while sole prop pays SE tax on everything