FICA is a combination of two federal taxes, and it’s required to be withheld from certain types of income. In general, the Internal Revenue Service does not double-tax income you receive, which means if you paid tax on it before, you should not pay tax on it again. For the most part, this rule applies to your qualified retirement plan income.
FICA taxes are the combined total of Social Security and Medicare taxes you pay on certain sources of income. These taxes are withheld at flat percentage rates, based on your total earnings subject to FICA. FICA payments withheld are converted to credits and posted to your Social Security account. These credits determine the amount of Social Security benefits you receive during retirement.
Income Subject to FICA
Not all sources of income are subject to Social Security and Medicare taxes. Wages from employment and profits from a sole proprietorship or partnership are examples of earnings that FICA must be paid on. If you earn W-2 wages, you pay half the FICA taxes on your income and your employer pays the other half. If you’re self-employed and file Schedule C or receive partnership income, you pay the entire FICA tax on your net profits.
Retirement income is not subject to FICA. You already paid Social Security and Medicare taxes on this income while you were working. Contributions to a 401k or similar employer-sponsored retirement plan are subject to FICA taxes even if you fund the plan pretax, so you already paid the FICA taxes on distributions you receive from these types of accounts as well. All retirement income, including Social Security benefits, retirement plan distributions and pension or annuity payments are excluded from additional FICA taxation.
Although all types of retirement income are exempt from FICA tax, some types may still be subject to income tax. In general, income tax is due on distributions from plans that were funded pretax, or from which you received a previous tax deduction. Examples of plan distributions subject to income tax include 401k, 403b and traditional IRA payments. Social Security benefits may be taxable depending on your income from other sources, but it is never 100 percent taxable. Other retirement plan payments may not be taxable at all during retirement, such as distributions from a Roth IRA. In most cases, income tax is withheld from your retirement payments if you receive checks from a plan subject to tax. This helps offset the tax due on the income when you file your return.