- Do I Have to Pay FICA on Retirement Income?
- How Much Social Security Tax Do You Have to Pay?
- What Is the Difference Between Payroll Tax & Income Tax?
- Is a Pension Taxable at the Same Rate As Ordinary Income?
- Are Earnings From Social Security Retirement Taxable?
- Do 401(k) Deductions Reduce FICA Wages?
You may get senior discounts from local stores when you retire, but not from the government. Retirement doesn't cut your responsibility to pay income tax or Social Security and Medicare -- known as FICA taxes. If your sources of income change in retirement however, you may be able to leave FICA behind. Social Security benefits, for example, aren't subject to FICA taxes.
If you've set things up to live off your investments, you're off the hook. Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings as far as the Social Security Administration is concerned. If you contributed your wages to a retirement account, such as a 401(k) or IRA, you paid FICA taxes when you earned the money, so you don't have to pay them again.
If you start a second career in retirement, you pay FICA tax on your income, just as you did when you were younger. If you go into business for yourself, you pay self-employment tax any time your net income tops $400. Self-employment tax is twice the regular FICA tax. Employers normally match the employee tax rate but when you're self-employed, you're both employer and employee, so you pay both halves.
Deferred compensation plans postpone some of your salary until after you leave the company. Because you don't receive the income right away, you don't pay tax on it right away either -- not income tax, not FICA tax. If there's a point at which you vest -- that is, if you have a guaranteed right to the income, even if you don't collect it immediately -- you pay FICA and income taxes on it then. If you don't vest until you collect the cash in retirement, that's when your tax bill comes due.
If you receive severance pay when you leave your job, whatever you get -- one month, two months -- is subject to income and FICA taxes. One possible exception is if you get the pay because your company went out of business. The Sixth Circuit Court ruled in 2012 that in that case, severance pay wasn't subject to FICA. This ruling doesn't affect severance pay received in other court jurisdictions. At the time of publication, the government hadn't announced whether it would appeal.
- CNN Money: What Is FICA?
- Social Security Administration: Income From Pensions, Annuities, Interest And Dividends
- Social Security Administration: Paying FICA Taxes on Wages When Drawing Social Security
- CPA With a View: Deferred Compensation and FICA Taxes
- Wolters Kluwer: Sixth Circuit Rules Severance pay not Subject to FICA Tax