FICA Tax on Retirement Income: What You Need to Know

FICA tax can be a complex topic, but understanding how it applies to retirement income is crucial for making informed decisions about your finances.

You pay FICA tax on your earnings from a job, but what about in retirement? The good news is that you won't pay FICA tax on your retirement income, including pensions, annuities, and Social Security benefits.

However, if you're receiving income from a job while also receiving retirement income, you may be subject to FICA tax on your earnings. This is because FICA tax is tied to your earnings, not your age or retirement status.

As a general rule, if you're under age 65 and working, you'll pay FICA tax on your earnings, even if you're also receiving retirement income. But if you're 65 or older and working, you may be exempt from paying FICA tax on your earnings.

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FICA is the tax deducted from payroll per the Federal Insurance Contributions Act, passed in 1935. It imposes a payroll tax on salaries and other wages to fund Social Security and Medicare benefits.

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The portion that supports Social Security is financed by a 12.4 percent tax on earnings up to a 2022 maximum of $147,000. Employees and employers each pay 6.2 percent, while self-employed individuals bear the entire 12.4 percent levy.

The Medicare tax rate is 1.45% for employees and employers, but there is no maximum wage limit. As with Social Security, self-employed taxpayers are responsible for the full 2.9 percent of Medicare contributions.

Highly compensated individuals also pay an additional 0.9 percent for Medicare on amounts over $200,000 for single taxpayers or $250,000 for married taxpayers filing jointly.

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You may not pay FICA taxes on certain types of retirement income, such as interest, dividends, pension payments, and annuity distributions. These types of income are excluded from FICA deductions.

If you receive Social Security benefits, you may owe income taxes, but not FICA taxes. The amount you owe in income taxes depends on how much you receive and your overall tax situation.

You already paid FICA taxes when you earned money in a 401(k) or IRA, so when you withdraw from these accounts, the amounts are tax-free, including any growth or matching contributions from your employer.

If you're collecting Social Security and still working, there are some important things to keep in mind.

Income is key when it comes to retirement, and your earnings can affect more than just your Social Security benefits.

Your paycheck can impact the amount you receive monthly, the amount you owe in taxes for the year, and your Medicare premiums.

Here are some key takeaways to consider:

You'll pay Social Security and Medicare taxes on any wages earned in retirement, with no age limit or exemption for Social Security benefits status.

These taxes can increase your benefit payments if you're earning more in retirement than before, as the Social Security Administration will check your earnings record each year and update your benefit accordingly.

There's no impact on your benefits if you're making less in retirement, since the benefit payment is based on your 35 highest years of earnings.

Your earnings may also push you into a higher tax bracket, and into a higher threshold for your Medicare premiums once you're over 65 and enrolled in Medicare.

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The cost for Medicare Part B can range from $259 to $628.90 per month in 2025, depending on your income level, with a fixed rate of $185 a month for most participants.

If your income is above $106,000 as an individual or $212,000 as a married couple, you may have to pay IRMAA (Income-Related Monthly Adjusted Amount) in addition to your Part B or Part D premium.

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You may not pay FICA taxes on Social Security benefits, but you may owe income taxes on the amount you receive, depending on your overall tax circumstances.

If you receive Social Security benefits, you'll need to compare the base amount for your filing status with the total of one-half of your benefits and all your other income, including tax-exempt interest.

Here's a simplified breakdown of the comparison:

Note that you shouldn't reduce your other income by any exclusions for things like interest from qualified U.S. savings bonds or foreign earned income.

If you know you'll have to pay tax on your Social Security benefit, it's a good idea to have Social Security withholding taxes taken directly from your payments to avoid issuing checks for estimated tax payments throughout the year.

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Some of your Social Security benefits may be taxable, but to determine which ones, you need to compare the base amount for your filing status with the total of your other income, including tax-exempt interest.

The base amount varies depending on your filing status, so be sure to check the IRS guidelines for the specific amount that applies to you.

To make this comparison, don't reduce your other income by any exclusions for certain types of income, such as interest from qualified U.S. savings bonds, employer-provided adoption benefits, and interest on education loans.

You should include all your other income, including tax-exempt interest, in the comparison.

Here's a breakdown of the types of income that don't get reduced:

You can have taxes withheld from your Social Security benefits, which can make tax time less stressful. To do this, you'll need to complete Form W-4V (Voluntary Withholding Request).

The Social Security Administration provides four federal tax withholding options: 7%, 0%, 12%, and 22%. These percentages are applied to the full amount of your Social Security benefit, not just the 50% or 85% that is taxable.

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To make a withholding election, you'll need to mail or drop off the completed form at the closest Social Security Administration office. This can save you from having to issue checks for estimated tax payments throughout the year, which can be a hassle.

Here are the four federal tax withholding options available for Social Security benefits:

By having taxes withheld from your Social Security benefits, you can avoid a large tax bill at the end of the year and make tax time less stressful.