Social Security tax is also called Federal Insurance Contributions Act tax because the FICA mandates its collection. Pretax deductions are employer-sponsored benefits that meet the regulations of the respective Internal Revenue Code. As an employee, your employer is required to take Social Security taxes out of your paychecks. If you have pretax deductions, they affect how your employer calculates your Social Security withholding.
Pretax deductions vary by employer. In many cases, an employer offers health insurance and traditional 401k plans on a pretax basis. Because pretax benefits are deducted from wages before certain taxes are withheld, they tend to lower taxable wages and increase take-home pay. Pretax health insurance plans are also called Section 125, or cafeteria, plans, and may include medical and dental insurance and flexible spending accounts. Cafeteria plans are not subject to Social Security tax, but pretax 401k contributions are.
Social Security Rates
Social Security tax is withheld at a flat percentage of your pay; the federal government sets the amount for each year. In 2012, your employer is required to withhold Social Security tax at 4.2 percent of your taxable gross earnings, up to $110,100 for the year. Once you have earned the maximum wage limit, your employer stops the withholding and continues it when the next year starts.
Section 125 Calculation
Because cafeteria plans are not subject to taxation, they are deducted from gross income before taxes are withheld. This procedure reduces your taxable wages. Before calculating Social Security tax, your employer subtracts all of your Section 125 plan premiums from your gross pay. Let’s say you earn $550 weekly. You pay $75 toward your pretax medical family plan and $15 toward your pretax dental family plan. Your employer subtracts $90 from $550. This leaves $460, which is subject to Social Security tax. At the time of publication, your Social Security withholding would be $19.32, which is $460 times the 2012 tax rate of 4.2 percent.
If you have a traditional 401k plan you make contributions in pretax dollars. Although this type of retirement plan is not subject to federal income tax, Social Security tax applies. For example, you earn $1,200 biweekly. If you do not have a cafeteria plan, the entire $1,200 is subject to Social Security tax. Therefore, you pay $50.40 biweekly in Social Security tax; this is $1,200 times 4.2 percent. If you had a cafeteria plan as well as a traditional 401k, your employer would subtract the cafeteria plan from your gross pay. The remainder would be subject to Social Security tax.
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.