FICA

What it means

FICA stands for the Federal Insurance Contributions Act. It is a mandatory payroll tax used to fund Social Security and Medicare benefits for retirees and others in need.

When you receive certain types of equity compensation, like Restricted Stock Units (RSUs) or Non-Qualified Stock Options (NSOs), the government often treats that value like regular pay. Your company will calculate these taxes based on the value of the shares when they vest (become yours) or when you exercise (buy) your options.

A simple example

Imagine Alex earns $210,000 in salary and gets $50,000 worth of RSU stock that vests this year. The Social Security tax (6.2%) stops after the first $184,500 of total pay. Alex pays 6.2% on the first $184,500 ($11,439). For the remaining $75,500, Alex pays only the 1.45% Medicare tax ($1,094.75). Because Alex's pay is over $200,000, they also pay an extra 0.9% Additional Medicare Tax on the $60,000 above that line ($540).

Why it matters to you

• These taxes are usually taken out automatically by your employer through withholding (taking tax money directly from your pay or shares).
• Once your total income for the year goes over $184,500, you stop paying the Social Security portion of the tax.
• The extra 0.9% Medicare tax kicks in once you earn more than $200,000, which can be triggered by your stock income.

Common mistakes to avoid

• Assuming your stock compensation is tax-free because it is not a cash paycheck.
• Forgetting that stock income counts toward the $200,000 limit for the Additional Medicare Tax.
• If you are unsure how these taxes affect your total tax bill, a tax professional can help.

Words used on this page

• Restricted Stock Unit (RSU): A promise from your company to give you shares of stock once you meet certain conditions.
• Non-Qualified Stock Option (NSO): A right to buy company stock at a set price; you are taxed when you use this right.
• Vesting: The moment you officially own your stock or options.
• Exercise: The act of using your option to buy shares.
• Withholding: When your employer keeps a portion of your pay or stock to send directly to the government for taxes.