Social Security and Medicare taxes make up the Federal Insurance Contributions Act, or FICA. Most employers, employees and self-employed individuals must pay FICA taxes. However, the Internal Revenue Service, which administrates Social Security and Medicare taxes, provides some exemptions.
Cafeteria Plan Benefits
A cafeteria plan is an employer-sponsored program that meets the criteria of Section 125 of the Internal Revenue Code. The plan allows employees to make pretax contributions, meaning the benefit is deducted from their wages before taxes are taken out. The following pretax benefits are exempt from FICA taxes: health and accident insurance, health savings account, flexible spending account, dependent care assistance and group-term life insurance for coverage of $50,000 or less.
Under IRC 132 and the Transportation Equity Act for the 21st Century, or TEA-21, employers can offer employees transportation benefits. Employees allocate a specific portion of their wages on a pretax basis for this purpose. Transit fees typically cover the use of mass transportation, such as fares for bus, train, subway and vanpool. They also cover parking and must be used only for traveling back and forth to work. Employees can buy up to a certain amount per month for transit and parking expenses, which are exempt from Social Security and Medicare taxes.
Business Expense Reimbursement
Employers can reimburse their employees with nontaxable money for certain business expenses. To provide this benefit, the employer must establish an accountable plan that meets IRS requirements. The expense must be connected to the business and the employee must submit proof of the expense within a reasonable time frame. The employee must also give the employer back any amounts exceeding the validated expenses within a reasonable period of time. Qualified reimbursements exempt from FICA taxes may include costs for meals, entertainment, cell phone, Internet, tools, supplies, client meetings, vehicle usage and certifications and training.
Exempt Employees, Workers and Organizations
Certain employees and workers are excluded from FICA Tax. For example, students who work for a school, university or college they attend may be exempt. Nonresident aliens with specific visas -- such as A-visas, D-visas, and F-visas -- do not have to pay Social Security and Medicare taxes. Temporary foreign agricultural workers, student nurses, workers for international organizations or foreign governments, and children under 18 who work for their parents are exempt. Certain members of recognized religious groups, churches and organizations controlled by the church are excluded from FICA taxes.
- IRS.gov: FAQs for Government Entities Regarding Cafeteria Plans
- Core Documents: Section 132(f) Qualified Transportation Fringe Benefit – Commuter Parking and Transit Benefit Plan Document $99
- Stanford University: Payroll Deduction
- L. Burdick and Associates: Employee Reimbursements Under Accountable and Nonaccountable Plans
- American Institute of CPAs: Tax Advantaged ‘Accountable Plans’ for Employee Business Expenses
- IRS.gov: Aliens Employed in the U.S. – Social Security Taxes
- IRS Tax Map: Exemption from Self-Employment (SE) Tax
- ClergyTaxes.com: Clergy and the Church