When you take your first job and get that first paycheck, you learn something very important: from every paycheck, a sizable chunk of money will be set aside. In addition to taxes, you’ll also see a deduction for FICA, which stands for the Federal Insurance Contributions Act. Under this act, part of your earnings is withheld to help take care of you once you retire and you receive Social Security. You won’t get out of paying into Social Security by working for yourself. In those instances, the money will be taken out through a self-employment tax at tax time. Only select groups of people living in the U.S. don’t have money taken out of their taxes by the government for later in life.
Although resident immigrants have Social Security withheld, there are exceptions in the law for nonresident aliens. This only applies to those holding certain types of visas, including A-visas, who are foreign government employees, and eligible visa holders who work on a campus, serve in a teaching capacity or represent a foreign interest for an international organization, such as the United Nations.
Students Employed at Their Schools
Certain students may be exempt from paying FICA if they’re employed by the school where they’re studying. For this to apply, though, the employee will need to be shown to be a student first and an employee second. In other words, a university employee who takes advantage of the free or discounted education available to workers on campus will not qualify as exempt from Social Security withholdings for this purpose.
There are multiple reasons why a member of a religious organization might earn exemption from paying into Social Security. Ministers could be exempt from paying on their earnings for ministerial services, but that exemption wouldn’t apply to any other type of self-employment income they earn. Religious parties also may file for an exemption because they are “conscientiously opposed” to any type of public insurance because of religious beliefs. The religious exemption is requested using Form 4029 and must be approved by the IRS to be valid.
Although this applies to only a small percentage of the population, there is a limit to how much of your earnings can be taxed. You’ll pay Social Security on your income up to that limit, with the rest being free and clear. For 2018, that maximum is $128,400, so anything you earn above $128,400 will not be taxed for Social Security. This does not exempt you from paying Medicare and other taxes on those earnings. However, if you consistently earn well above $128,400 throughout your working life, you may find that you don’t have as much set aside for retirement as you expect.
Some Government Employees
Until the 1980s, federal government employees had a separate system for setting aside retirement dollars, called the Civil Service Retirement System, or CSRS. In 1984, a new system called the Federal Employees Retirement System, or FERS, was introduced. Anyone who joined the federal government as an employee in 1984 or later was put directly into FERS, where Social Security withholdings cover federal employees. Some members of CSRS chose to make the switch to FERS, but those who didn’t may still be gathering their retirement funds solely from their pension. Those employees are covered under Medicare, however, since they continue to pay Medicare taxes on their earnings.
Those Paid in Cash
If you’re an employee paid solely in cash, you may be responsible for claiming the funds. If you or your employer choose not to do this, this qualifies as tax evasion. You also risk reaching retirement and finding you haven’t paid enough in to cover your golden years. However, there are many perfectly legal reasons someone might be paid in cash, such as a teenager who babysits or mows yards for extra spending money. It’s important to know the income limit on this. The first issue will be whether the person earned enough to even qualify for filing a tax return. As of 2018, the minimum amount is $10,400. If a qualifying child or adult makes more than $10,400 working for someone, that likely will qualify that person to be claimed as a part-time employee or contractor.
- IRS: Aliens Employed in the U.S. – Social Security Taxes
- IRS: Student Exception to FICA Tax
- IRS: Publication 517 (2017), Social Security and Other Information for Members of the Clergy and Religious Workers
- SSA: Maximum Taxable Earnings (1937 - 2018)
- SSA: Federal Government Employment
- IRS: Employer and Employee Responsibilities - Employment Tax Enforcement
- Forbes: Do You Need To File A Tax Return In 2018?
- What is FICA?
- Investopedia: How Social Security works for the self-employed
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