Whether or not you pay FICA taxes on the money you earn and put toward a Health Savings Account depends on how you pay for it. You can have the contribution deducted from your paycheck each pay period, or make the payments directly yourself.
This will affect whether you pay income tax, FICA and/or qualify for a deduction on your tax filing. Understanding how HSA contributions affect your taxes will help you reduce your tax liability in the most advantageous way possible.
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What Is an HSA?
In addition to traditional company-provided health insurance, you might be able to purchase other health care products such as a Health Reimbursement Account, Flexible Spending Account and Health Savings Account. An HSA allows you to contribute to a plan that lets you put aside tax-free money to help pay for deductibles, copays, coinsurance and other healthcare-related expenses.
You can't use this money to pay for health insurance premiums. You can only contribute to an HSA if you have a High Deductible Health Plan. Check to see if any plan you currently have or are considering buying is HSA-eligible if you want to use this option to help you reduce your health care costs.
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How Does FICA Work?
The Federal Insurance Contributions Act requires that American taxpayers contribute money toward their Social Security and Medicare benefits. As an employee, you pay 7.65 percent of your paycheck to FICA (as of 2022), while your employer matches that amount.
If you work for yourself as a freelancer, gig worker or contractor, you must pay SECA tax, paying the entire amount, 15.3 percent amount, to help fund your Social Security and Medicare benefits.
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FICA Taxes and HSAs
When you earn money as an employee (not as a contractor), your company takes FICA, state and federal income taxes out of your paycheck. Some of the benefits you receive might be tax-deductible, including your HSA contribution. Let's say you contribute $1,000 toward your HSA.
If you have it deducted from your paycheck, also known as an HSA pre-tax payroll deduction, you don't receive that $1,000 as income, so you don't pay federal income tax or FICA tax on it. This only applies to the maximum HSA contribution amount you can contribute each year. Check that amount at the start of each year to learn what you can contribute tax-free.
If you make the $1,000 contribution using your own money (it's not taken out of your paycheck), you can deduct that on your income tax return and won't pay income tax on that $1,000. However, you will already have paid the FICA tax on that money.