What Is the Difference Between Federal Withholding Tax & FICA?

by Grace Ferguson
Federal income taxes aren't the only hit to your paycheck.

You may notice the different federal taxes that come out of your paycheck but have no idea how they're calculated. The U.S. Congress establishes federal employment taxes, including income taxes, Social Security tax and Medicare tax. The latter two are called FICA taxes; they go hand in hand. Income tax is a standalone tax with its own set of rules. Employees pay federal taxes through withholding, and self-employed people pay their own taxes.

Income Tax Calculation

Your employer takes federal income tax from your paycheck based on your Form W-4 and Internal Revenue Service Circular E. Your employer uses the Circular E tax table that matches your wages and pay period, along with the allowances and filing status you indicate on your W-4. Self-employed people who do not pay federal income tax through withholding or employees who don't have enough tax withheld may have to pay estimated tax. This is especially true if they receive income in the form of interest, dividends, rent, royalties and capital gains. Self-employed people use the worksheets in IRS Publication 1040-ES to figure their estimated tax, which is due quarterly.

FICA Rates

As of 2012, your employer takes Social Security tax at 4.2 percent of your wages, up to $110,100 for the year, and Medicare tax at 1.45 percent. Your employer pays Social Security tax at 6.2 percent of wages, up to $110,100 for the year, and Medicare tax at 1.45 percent. It pays all of your federal withholding taxes and its own part of FICA to the IRS, typically semiweekly or monthly. Self-employed people pay the entire amount of 10.4 percent of earnings for Social Security tax, up to $110,100 for the year, and Medicare tax at 2.9 percent. However, the IRS allows these workers to deduct half of their total FICA tax when they file their federal tax return on Form 1040.


Your federal income tax withholding goes toward national programs such as defense, interest on national debt, foreign affairs and law enforcement. Your Social Security withholding provides benefits for the disabled and their dependents as well as retirees and their dependents. Your Medicare withholding pays medical and hospital insurance to eligible people when they reach age 65.


The IRS is the sole administrator of federal income tax, but it splits the responsibility for FICA taxes with the Social Security Administration. Taxpayers file their federal tax return with the IRS, but employers must file annual W-2s with the SSA to report taxes withheld so their employees get credit for future benefits.


The story behind federal withholding goes way back. In 1943, the Current Tax Payment Act gave the government the right to collect taxes on wages via withholding, according to an article published in "The Cato Journal." Withholding allows the government to fund the country's welfare system. Social Security came into existence in August 1935 when President Franklin D. Roosevelt signed the Social Security Act. The first taxes were collected in January 1937. When the Social Security Act was amended in 1939, the taxing rules were taken out of this law and put under the Internal Revenue Code, then renamed the Federal Insurance Contributions Act. Medicare, which was passed into law in July 1965, makes up the other half of FICA.

About the Author

Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.

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