The Federal Insurance Contributions Act (FICA) imposes Social Security and Medicare taxes on income earned from working. As of 2018, the Social Security tax equals 6.2 percent for the employee and 6.2 percent for the employer, and the Medicare tax equals 1.45 percent for the employee and 1.45 percent for the employer. When you retire, your sources of income often shift from earned income to investment income and retirement benefits, so you might not be required to pay FICA taxes on most, if not all, of your income in retirement, depending on where the money comes from.
You won't have to pay FICA taxes on many types of retirement income, including Social Security benefits, pensions, annuities, 401(k) distributions and IRA distributions. However, you can expect to still pay FICA taxes on any earned income from a post-retirement job.
FICA Taxes on Retirement Benefits
In retirement, many people rely on their savings, Social Security benefits, and pension benefits for their income, rather than wages or salaries. Many types of retirement income aren’t subject to FICA taxes because they aren’t considered wage income from working. For example, distributions from your IRA or 401(k) aren’t subject to FICA taxes. Also, if you receive a pension or annuity, those payments aren’t subject to FICA taxes. Other investment income, such as interest, dividends and capital gains are also exempt from FICA taxes. Finally, your Social Security benefits aren’t subject to FICA taxes. But, just because certain types of retirement income aren’t subject to FICA taxes doesn’t mean that you don’t have to include it in your taxable income for income tax purposes.
Working in Retirement
Many people choose to continue to work part-time, on a consulting basis, or start their own businesses in retirement. If you continue to work, your wages continue to be subject to FICA taxes. If you become an independent contractor or start your own business, you will pay self-employment taxes on your net self-employment income. Self-employment taxes equal the total of the employer portion and the employee portion of FICA taxes, which is 12.4 percent for Social Security taxes and 2.9 percent for Medicare taxes as of 2018.
No Age Limit on FICA Taxes
Even though FICA taxes are intended to pay for different types of retirement benefits, such as Social Security and Medicare, FICA taxes apply regardless of your age. For example, if you are 85 but you’re still working and you earn a $50,000 salary, you still pay FICA taxes on that income even though you’re already eligible for Social Security benefits. Or, if you’re still doing consulting as an independent contractor when you’re 90, that income is still subject to self-employment taxes.