What Deductions Are Exempt From Federal Taxes but Not FICA?

Deductions offered under your employer’s cafeteria plan are often exempt from federal income tax and Social Security and Medicare taxes; the latter two are called Federal Insurance Contributions Act taxes. In some cases, you do not pay federal income tax on your deductions, but FICA taxes apply, even when the benefit is offered under a cafeteria plan.

Adoption Assistance

An adoption assistance program lets you use pretax payroll deductions to pay for specific expenses that come with legally adopting a child. Expenses include legal adoption, attorney and court costs; agency fees; and traveling, lodging, medical services and counseling expenses. Your payroll deductions for adoption assistance are exempt from federal income tax, but not Social Security tax and Medicare tax.

Retirement Contributions

Contributions toward pretax retirement plans, such as traditional 401(k) and individual retirement accounts, safe harbor and SIMPLE 401(k) and 403(b) accounts, are excluded from federal income tax. However, you must pay Social Security tax and Medicare tax on your contributions.

Life Insurance

Group-term life insurance premiums on coverage up to $50,000 are exempt from federal income tax and FICA taxes. Contributions on coverage over $50,000 are exempt from federal income tax but not FICA taxes.

FICA Rates

As of 2013, you pay Social Security tax at 6.2 percent on your wages and taxable pretax deductions, up to the annual wage limit of $113,700. You pay Medicare tax at 1.45 percent on all wages and taxable pretax deductions. As a single person, if you earn more than $200,000 for the year, you must pay an additional 0.9 percent in Medicare tax on the excess amount. The annual threshold for additional Medicare tax for married couples filing jointly is $250,000; for married couples filing separately, the threshold is $125,000. The annual threshold includes your wages and taxable deductions.

Considerations

Your deductions that are exempt from federal income tax are not included in your taxable wages in Box 1 of your annual W-2 form. Deductions that are not exempt from FICA taxes are counted in your taxable wages in boxes 3 and 5 of the form.

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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