What Types of Income are Subject to FICA TAXES?
The most common type of income that is subject to FICA is income that an individual receives from their employer. FICA is the common abbreviation for the Federal Insurance Contributions Act. FICA is the category heading that includes social security and Medicare taxes. The majority of income that results from employment is subject to FICA taxes; however, there are certain payment restrictions that may be applied.
Some employers provide their employees with assistance for caring for their children or any disabled dependants. According to the IRS married couples can receive up to $5,000 in child or dependent care expenses without being taxed. Married individuals who are seeking joint returns are only eligible for receiving $2.500 worth of non-taxable payments.
There are many small business owners who rely on their children for help with employment. Legally children are able to work or perform work-related actions for a family member. Children who are under the age of eighteen and work for their parents are not subject to the FICA tax withholdings that traditional employees are.
A large number of American workers make or receive contributions to a pension or 401(k) retirement plan. The contributions made by employers are not subject to FICA taxes; however, payments made by employees are. Therefore each time that an employee places money into their 401(k) plan account they are being taxed.
When an employer closes down their business or has to layoff any number of employees, a severance pay is often given. This Severance pay is often given to employees to help them financially survive while searching for a new job. Although the severance pay is not the same as a traditional paycheck it is treated as if it were. All severance pay packages are subject the tax withholdings allowed by FICA.
Many times when an individual comes down with a serious illness they are given a sick day. A large number of employers pay their employees for a limited number of sick days each year. The pay obtained from sick pay will appear on a traditional paycheck. The sick pay is also subject to FICA taxes like traditional paycheck earnings are.
A large number of individuals work in professions that allow them to receive tips from customers. All tips must be reported to the government. According to the IRS tips totaling more than $20 a month are subject to FICA taxes. All employees receiving tips are legally required to inform the government and pay taxes on any and all tips earned over $20 a month.
Although the taxing of FICA taxes, including social security and Medicare, may seem like a pain they are a way to save for important government run programs. When a traditional taxpayer ages they will likely receive social security payments and Medicare benefits; therefore, taxpayers are basically saving for their future.