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.
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.