Did Your Paycheck Suddenly Increase by 6.2%?

Do you ever look at your pay stub? These days, with automatic deposits and paperless transactions, you may not pay much attention to what’s being withheld from your check each pay period. What’s more, many people don’t understand how the whole payroll tax system works, which I get, because, yeah, it’s a bit complicated.   

But this lack of knowledge may actually be working against you. 

If you do happen to look at your pay stub, you’ve probably seen a deduction for FICA and Medicare.  The Medicare part is pretty easy to figure out – it’s the premium you pay so you can collect your Medicare benefits once you turn age 65. 

But FICA is for some people an unknown.  FICA is an acronym for the Federal Insurance Contributions Act. Simply put, it’s the premium you pay that allows you to one day collect your Social Security benefits, whether it’s Retirement, Disability or Survivor benefits.  You and your employer both pay 6.2% of your salary as FICA, and another 1.45% each for Medicare.  So naturally, the more you earn, the more you pay in both FICA and Medicare taxes. 

But what you may not know is that while you pay the Medicare tax on an unlimited amount of earnings, you stop paying the FICA tax at a certain level of income each year.  For 2023, that level is $160,200 of gross wages. After you pass that threshold, the 6.2 percent FICA tax you and your employer have been paying goes away. 

What this means, in effect, is that you get a 6.2 percent raise for the rest of the year from the point when you reach that amount of gross earnings. 

Depending on your salary and what bonuses you may have earned, it could be that you already got the raise in your net paycheck and you don’t even know it, because your HR department is REALLY unlikely to let you know that you’ve hit the FICA-tax maximum – they just stop collecting the tax from your paycheck.  For others, it will happen closer to the end of the year. 

For people at that level of income, this is kind of like found money, which can be a great opportunity to save it and make it work for you this year.  If you find yourself in that situation, here are just a few ideas for what you could do with it: 

First, if you’ve got high-interest credit cards or car loans, you might use that extra money to pay off some debt.  

Or, if your debt is manageable, you may want to create an emergency fund. Having cash available for unforeseen needs can be really beneficial. 

Another option is to increase your 401(k) contribution if you aren’t on pace to max it out for the year.  Remember, you can save up to $22,500 this year in your retirement plan at work, and if you’re age 50 or older, the limit is $30,000. 

You could also max out your HSA plan, which may help lower your tax liability for 2023. 

If you’re saving for college, you may want to add it to a 529 plan.  Some states also give you a state income tax deduction for a 529 contribution. 

Or just set up a holiday cash fund.  That might help reduce some credit card debt going into the new year. 

These are just a few ideas, and maybe you have a couple of your own.  But if you’re lucky enough to get a 6.2 percent FICA tax raise this year, this may be a great opportunity to do something good for yourself AND for your financial future. 

We help our clients to make decisions both big and small here at Lucia Capital Group. How can we help you the most? Just give us a call.