Frequently Asked Questions
Yes, Social Security and OASDI (Old-Age, Survivors, and Disability Insurance) are essentially the same thing. OASDI is the official name of the program that provides retirement, survivor, and disability benefits to eligible individuals. It is commonly referred to as Social Security because it is administered by the Social Security Administration (SSA). When people talk about “Social Security,” they are typically referring to the OASDI program. So, Social Security and OASDI can be used interchangeably to refer to the same program.
The Additional Medicare Tax is a tax that was introduced as part of the Affordable Care Act (ACA) and is designed to help fund Medicare. It is a 0.9% tax that applies to wages, salaries, and self-employment income above certain thresholds.
The threshold for the Additional Medicare Tax depends on your filing status. For single filers, the threshold is $200,000, for married filing jointly the threshold is $250,000, and for married filing separately the threshold is $125,000.
If you earn above these thresholds, your employer is required to withhold the Additional Medicare Tax from your wages or salary. If you are self-employed, you will be responsible for paying the tax on your own when you file your tax return.
It is important to note that the Additional Medicare Tax only applies to earned income and not to investment income or other types of unearned income.
Section 125 refers to a part of the U.S. tax law that allows employers to set up plans called “cafeteria plans” or “pre-tax plans.” These plans let employees pay for certain benefits using money from their paycheck before taxes are taken out.
Examples of benefits you might be able to pay for with pre-tax dollars through a Section 125 plan include health insurance premiums, flexible spending accounts (FSAs) for healthcare or dependent care expenses, and other eligible benefits.
It’s important to remember that Section 125 plans have specific rules and requirements, so it’s best to consult with your employer or a benefits professional to understand the details and options available to you.
No, not all pre-tax deductions are considered part of Section 125. While Section 125 of the U.S. tax law allows for pre-tax deductions, it specifically pertains to cafeteria plans or pre-tax plans established by employers. These plans provide a framework for employees to choose and pay for certain qualified benefits using pre-tax dollars.
Examples of pre-tax deductions that are typically included in Section 125 plans are:
- Health insurance premiums: Employees can contribute to their health insurance premiums on a pre-tax basis, reducing their taxable income.
- Flexible spending accounts (FSAs): FSAs allow employees to set aside pre-tax dollars to cover eligible healthcare expenses or dependent care expenses.
- Other eligible benefits: Section 125 plans may include pre-tax deductions for benefits such as dental insurance, vision insurance, life insurance, disability insurance, and retirement contributions.
However, not all pre-tax deductions are governed by Section 125. Some deductions, such as traditional 401(k) contributions or contributions to a health savings account (HSA), are governed by separate sections of the tax code. These deductions have their own rules and regulations.
It’s important to consult with your employer or a benefits professional to understand which deductions are part of your employer’s Section 125 plan and what other pre-tax deduction options may be available to you.
A cafeteria plan, also known as a Section 125 plan, is a type of employee benefits plan that allows employees to choose from a menu of different pre-tax benefits options. The name “cafeteria plan” comes from the idea that employees can select from a variety of benefits as if they were selecting items from a cafeteria menu.
A cafeteria plan typically includes several types of benefits, such as:
- Health insurance premiums
- Dependent care assistance
- Health savings accounts (HSAs)
- Flexible spending accounts (FSAs) for healthcare expenses or dependent care expenses
- Group term life insurance
- Disability insurance
- Retirement plans such as 401(k) contributions
With a cafeteria plan, employees can choose which benefits they want to enroll in, and they can allocate a certain amount of their salary to pay for those benefits on a pre-tax basis. By doing so, employees can lower their taxable income, which can result in lower taxes and a higher take-home pay.
Employers can also benefit from offering a cafeteria plan, as it can help them attract and retain employees by offering a more comprehensive and flexible benefits package. Additionally, offering a cafeteria plan can help employers save on payroll taxes by reducing the amount of taxable income for both the employer and employee.
It’s important to note that cafeteria plans are subject to certain IRS regulations, and there are limitations on the types of benefits that can be offered through these plans. Employers should consult with a benefits specialist or tax professional to ensure compliance with applicable regulations.
FICA stands for Federal Insurance Contributions Act, which is a payroll tax that is deducted from employees’ paychecks to fund the Social Security (OASDI) and Medicare programs.
The FICA tax is composed of two parts: the Social Security tax and the Medicare tax. The Social Security tax funds the Social Security program, which provides retirement, disability, and survivor benefits to eligible individuals. The Medicare tax funds the Medicare program, which provides health insurance for individuals over the age of 65, as well as certain individuals with disabilities or medical conditions.
The current FICA tax rate for employees is 7.65% of their wages, with 6.2% going toward Social Security and 1.45% going toward Medicare. Employers are also required to pay FICA taxes, with a matching contribution for the employee’s portion of the tax.
FICA taxes are automatically deducted from employees’ paychecks and paid to the government by their employers. The amount of FICA tax withheld is based on the employee’s wages and the current tax rate.
Overall, FICA taxes help to fund important social programs that benefit millions of Americans, and it is important for both employees and employers to understand how these taxes are calculated and paid.
Payroll reciprocity is an agreement between two or more states that allows employees who work in one state but live in another to pay income tax only to their state of residence, rather than having to pay income tax in both states.
For example, if an employee lives in State A but works in State B, the employee would typically have to file income tax returns and pay income tax in both states. However, if State A and State B have a payroll reciprocity agreement in place, the employee would only need to pay income tax in State A, and the employer would only need to withhold income tax for State A from the employee’s paycheck.
Payroll reciprocity agreements can be beneficial for both employees and employers by simplifying payroll processes and reducing the administrative burden of filing tax returns in multiple states. However, not all states have payroll reciprocity agreements in place, and the specific terms of these agreements can vary widely between different states. Employers should consult with their tax advisors to understand the specific requirements and implications of payroll reciprocity for their business.