What are the FICA Taxes?
Tip It!Have you ever wondered about those pesky FICA taxes that show up every paycheck? These are federal payroll taxes collected under the Federal Insurance Contributions Act (FICA). These taxes are used to support Social Security and Medicare. My employer denotes them as FICA-OASDI (Old-Age, Survivors, and Disability Insurance) and FICA-HI (Hospital Insurance), respectively.
Calculating Your FICA Taxes
The Social Security portion of the FICA tax is a flat 6.2% of gross compensation for wage earners, whereas the Medicare portion of the tax is 1.45%. These taxes are levied on both the employee and employer so, for every dollar taken from your paycheck, your employer is also paying a dollar. Of course, if you’re self-employed, you are both employer and employee. As such, these tax rates are effectively doubled to 12.4% and 2.9% for Social Security and Medicare, respectively.
The good news here is that, if you make enough money, the Social Security tax goes away. In 2006, the Social Security threshold was $94,200. In 2007 it was $97,500, and in 2008 it was $102,000. Thus, every dollar over $102k that you earned in 2008 is free of the 6.2% (or 12.4%) FICA-OASDI tax, though it’s still subject to the 1.45% (or 2.9%) FICA-HI tax.
While your employer should be aware of this cutoff and automatically stop withholding FICA-OASDI when you pass the threshold, you should keep an eye on them just to be sure. Also, if you work multiple jobs, or change jobs mid-year, you have to be especially careful, as each employer has no idea what’s going one elsewhere. If you pass the threshold in aggregate, they’ll withhold too much. The good news is that you can claim the overage back when you file your income taxes.
FICA Exemptions
While nothing in life is certain except for death and taxes, it’s actually possible to get out of paying FICA taxes, but only under very specific circumstances. As it turns out, students that are enrolled half-time (or more) at a university and who are also working part-time for that university are exempt from FICA payroll taxes. Aside from that, you’re on the hook for these taxes.
Published on January 6th, 2009 - 23 Comments
Filed under: Taxes
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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January 6th, 2009 at 9:24 am
Very thorough and informative explanation, especially pointing out the student/university employment relationship-I don’t think it is something that is widely known. One thing to add: cafeteria/Sec 125 plans are one way of reducing the tax liability since contributions to these plans are made pre-tax.
January 6th, 2009 at 9:56 am
Another exception to FICA is working for the government. Not all government workers mind you, but some. I work for the state of Illinois, and I pay 8% of my wage into a retirement plan set up for state workers. This is not optional, but is in lieu of FICA and is a better deal (IMO).
Regards,
Erich
January 6th, 2009 at 11:51 am
Thanks for the explanation, I was attending and working at a university and saw that it was charged on one paycheck for some reason, but then never again so I did not worry about it. I just knew that generally I never paid all of it and my check was a little better each week.
I actually thought that it was all university employees, not just ones that are students also, now I won’t sound like an idiot when talking to someone else about this.
January 6th, 2009 at 12:19 pm
philip: If you work over the summer and don’t take classes, you’re not exempt during that time period. Maybe your one aberrant check happened during a period when you weren’t taking classes?
January 6th, 2009 at 12:51 pm
I believe I paid FICA when in the military. That’s a gov’t job.
I never noticed the designation OASDIA until I saw it on my wife’s pay stub (she’s a teacher).
Wouldn’t it be great to check a box that said “no thanks” and get to keep that money to invest on your own?
January 6th, 2009 at 3:12 pm
I always just look at it every pay check and see how much money is being taken out. Never had a real understanding behind it. Thanks for clarifying that in a simple manner for me and everyone.
January 6th, 2009 at 4:08 pm
‘These taxes are levied on both the employee and employer so, for every dollar taken from your paycheck, your employer is also paying a dollar. ‘
:::
No, the employee pays ALL that payroll tax (15.3%).
Employer pays none of it, but merely with-holds that 15.3% from the workers paycheck… and hands it directly to the government taxman.
An employer hiring an employee always calculates how much that new employee is gonna cost in total compensation. If the taxman demands 7.65% from the employer for each employee, the employer simply reduces the direct pay offered to the employee in hiring & promotions … by 7.65%. The worker never sees that money/tax — and is deceived in believing his employer is generously paying half his FICA/Medicare taxes.
It’s pure FlimFlam.
This issue comes up here periodically… thought we brought the truth to light previously ??
January 6th, 2009 at 4:40 pm
doug: Tomato, tomahto. It’s part of your total compensation, the same as the employer contribution to things like health benefits. In fact, you could further argue that the employee is paying their own share of the electric bill, rent, etc., since those sorts expenses arguably keep the employer from paying the employee a higher salary. If it makes you feel better to say it your way then, by all means, do so. The point here is that there’s an “invisible” contribution that doesn’t come out of your stated salary (or wages, as the case may be), but… If you’re self-employed, then you need to explicitly account for that additional amount out of the money that you’re taking in.
January 6th, 2009 at 7:17 pm
Thanks for this information. My son just happens to be a full-time college student working at his college. I’ve passed the tip on to him.
Unfortunately, as a self-employed person, I am aware of how much I pay, but I’m glad he’s getting a break!
January 6th, 2009 at 9:29 pm
Also remember that even though you may be self-employed, the same limits apply to you as well.
January 8th, 2009 at 10:58 am
You can also avoid that by using your health spending acccount and/or dependant care. So on top of your tax rate, you’re saving an additional 7.65% off your taxes. Please use your spending account if you have it, especially the dependant care if you haev kids in day care!!!
June 4th, 2009 at 4:11 pm
What if you decide to take reduced benefits at 62 but continue to work… do you still pay into FICA-OASDI? It would seem nuts since you would get a rebate on those payments when you do you taxes!
July 31st, 2009 at 11:43 am
I have a question about FICA and FICA-OASDI taxes. I am a graduate student, but working as an intern for a county (government). I am wondering if I am excempted for the above two tax deds. They always show up in my paycheck ?
August 15th, 2009 at 8:59 pm
My son attended a state college in MA. and also worked for the same college for two semesters, they did not take out these taxes and when I did his taxes I was unaware of this exemption and figured he owed taxes because they did not take them out, can he file an amendment to get his money back????
January 14th, 2010 at 12:42 pm
Still the rich get richer while the poor get poorer! No way out. We live in America where the Gov. rules.
February 3rd, 2010 at 10:31 am
The article leaves out another way to get out of FICA entirely. If you can live entirely on Capital Gains and Dividends from buying and selling just about any asset, you don’t have to pay FICA at all. Only people that work JOBS pay FICA. The real rich (idle rich) don’t work JOBS and don’t pay in. Instead they collect assets, collect lease money, and buy and sell assets and don’t pay a dime.
May 18th, 2010 at 1:32 pm
You are also exempt from this if you are Amish. Seriously. It is against that religion to pay into any insurance program because it is an attempt to deny God’s will.
July 7th, 2010 at 10:34 am
My wife works in Afghanistan for civilian contractor. The first 91,400.00 is exempt of fed. income tax. Does that also include FICA-OASDI & FICA-HI tax?
January 7th, 2011 at 9:38 am
FICA is not Social Security, its just another income
Tax – ponzi scheme – Read Income Tax: Shattering the myths by Dave Champion
January 7th, 2011 at 9:56 am
Furthermore none of the income tax BS ever applied to
the vast majority of people living and working in
the 50 states – 99% plus – read the tax code you wont
find any part that makes you liable- Non resident aliens and their withholding agents are liable but not
you–read the tax code and then read Income Tax: Shattering the myths by Dave Champion.
January 31st, 2011 at 1:34 pm
While I’m sure the Dave Champion book is entertaining anger fodder, I’d recommend reading this before deciding not to “volunteer” to pay your taxes:
http://www.irs.gov/taxpros/art.....c224375578
January 31st, 2011 at 6:50 pm
Good luck in finding anything in the Federal Tax code
that would make a guy selling hot dogs in Boston Mass liable – You become liable when you open a bank account
with a Federal tax ID – fill out forms etc…
The government can only tax a privilaged activity like
selling tobacco or beer-(thats in the constitution)
Congress was never granted the power to tax the wages
and earnings of state citizens.
Screw the Irs, The UN, the Federal Reserve and the Queen of England.
April 25th, 2011 at 3:31 am
Every single one of these oafs that rant against the government are the first to stand in line demanding they get the disability benefit owed to them — even if they made minimum wage their whole life and, between medicare and disability, will receive 100x more than they paid.