The acronym FICA stands for the Federal Insurance Contributions Act, which authorizes Social Security and Medicare taxes. FICA taxes are levied on wages, tips and other compensation employees are paid, as well as on self-employment earnings. Some types of income are exempt from FICA taxes. In addition, workers don’t pay FICA taxes in some situations.
According to the Social Security Administration, income from sources other than work is exempt from FICA taxes. Dividends paid on stocks, interest from savings accounts or investments, capital gains, pensions and annuities all are exempt. Reimbursements by employers for out-of-pocket business expenses incurred by employees aren’t subject to FICA. Fringe benefits like housing allowances for clergy are not exempt, even if they aren’t subject to federal income tax. There is an annual earnings cap on Social Security tax, adjusted each year for inflation. In 2014 the cap was $117,000. Any income from a job or self-employment that exceeds the cap is exempt from Social Security tax, but not from Medicare tax.
Some workers do not pay FICA taxes. A number of state and local governments have chosen to provide alternative pension plans. Participating employees don’t pay Social Security tax, but continue pay Medicare tax. Members of certain religious groups, nonresident aliens working in the United States and employees of foreign governments may be exempt. Students who work for their schools may be exempt from FICA if they must be a student to be eligible for the job.
- IRS.gov: Topic 751 – Social Security and Medicare Withholding Rates
- Turbo Tax: Who Is Exempt from Paying Social Security Tax?
- Social Security Administration: Income from Pensions, Annuities, Interest and Dividends
- Guidestone: What Should Ministers and Churches Know about Social Security?
- Social Security Administration: State and Local Government Employees