Do You Pay FICA Taxes on HSA Contributions?

Health Savings Accounts (HSAs) offer tax advantages for individuals with high-deductible health plans, helping them save for medical expenses. Understanding how HSA contributions interact with payroll taxes—specifically FICA taxes—is key to maximizing tax benefits.

The method of contribution determines whether amounts are subject to Social Security and Medicare taxes, affecting overall savings and take-home pay.

HSA Contributions and FICA Basics

Federal Insurance Contributions Act (FICA) taxes fund Social Security and Medicare, with employees and employers each paying 7.65% on wages. Whether HSA contributions are subject to these taxes depends on how they are made.

When individuals contribute directly—such as through a personal bank transfer—these amounts are considered after-tax. They do not reduce taxable wages for FICA purposes but remain deductible when filing an income tax return. In contrast, contributions made through an employer’s Section 125 cafeteria plan—often via payroll deductions—reduce taxable wages before FICA taxes are applied.

For example, an employee earning $60,000 who contributes $3,000 to an HSA through payroll deductions would save $229.50 in FICA taxes (7.65% of $3,000). If the same contribution were made outside payroll, the savings would apply only to federal and state income taxes, not Social Security or Medicare. The difference is even greater for those contributing the maximum HSA limit, which in 2024 is $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those 55 and older.

Employer-Funded HSA Arrangements

Some employers contribute directly to employees’ HSAs as part of their benefits package. These contributions are not considered wages and are excluded from federal income tax, Social Security, and Medicare taxes, making them a cost-effective way to support employees’ healthcare expenses while reducing payroll tax liabilities.

Employer contributions vary. Some companies provide a flat dollar amount, while others match employee contributions up to a certain limit. For example, an employer may contribute $1,000 annually or match employee contributions up to $500. These amounts do not count toward an employee’s taxable income and do not reduce the amount an individual can contribute up to the IRS annual limit. However, total contributions—including both employer and employee amounts—must stay within the IRS cap.

Many employers use HSA contributions to encourage participation in high-deductible health plans (HDHPs). Some offer tiered contributions based on wellness program participation or years of service. For instance, an employer might deposit an additional $200 if an employee completes an annual health screening. These incentives help employees manage healthcare costs while promoting preventive care.

Payroll Deductions and FICA

When employees contribute to an HSA through payroll deductions under a Section 125 cafeteria plan, their taxable wages are reduced before federal income tax, Social Security, and Medicare taxes. This pre-tax treatment lowers both the employee’s and employer’s payroll tax liability, making it a more tax-efficient option than direct, out-of-pocket contributions.

The tax savings extend beyond FICA. Lower taxable wages can also reduce state income tax in jurisdictions that follow federal pre-tax treatment. However, not all states conform. California and New Jersey, for example, do not exempt HSA contributions from state income tax, meaning employees there may still owe state taxes on payroll-deducted contributions.

Employers also benefit, as their FICA tax obligation—matching the 7.65% employee contribution—is based on taxable wages. By facilitating HSA contributions through payroll, businesses reduce their overall payroll tax burden. For a company with 100 employees contributing an average of $3,000 each, this could mean more than $22,000 in annual payroll tax savings. Some employers reinvest these savings into additional HSA contributions or wellness incentives.

After-Tax Contributions

When individuals contribute to an HSA outside an employer-sponsored payroll system, these amounts are made using after-tax dollars. While they still qualify for an above-the-line deduction on a federal income tax return, they do not reduce wages for Social Security and Medicare taxation.

For self-employed individuals or those whose employers do not offer HSA payroll deductions, after-tax contributions are the only option. Unlike traditional employees who benefit from payroll tax savings, self-employed individuals must pay self-employment taxes—including both the employee and employer portions of FICA—on their earnings before making HSA contributions. However, the income tax deduction still applies, reducing adjusted gross income (AGI) and potentially lowering overall tax liability.

Another consideration is the impact on Social Security benefits. Since Social Security payments are based on lifetime taxable earnings, reducing FICA-taxable wages through payroll deductions can slightly lower future benefits. Individuals who contribute after-tax maintain a higher reported wage base, which could result in marginally higher Social Security payments in retirement.

Reporting on Tax Forms

How HSA contributions are reported depends on how they were made. Employer contributions and pre-tax payroll deductions appear on an employee’s Form W-2, while after-tax contributions must be reported separately when filing a tax return.

Form W-2 includes HSA contributions in Box 12 with code “W,” covering both employer contributions and employee pre-tax payroll deductions. Since these amounts are already excluded from taxable wages, no further adjustments are needed when filing Form 1040. However, individuals who make after-tax contributions must report them on Form 8889, which calculates the deduction applied to taxable income. The total HSA contribution amount from all sources must not exceed the IRS limits for the year.

If excess contributions are made, the surplus must be withdrawn before the tax filing deadline to avoid a 6% excise tax. If not corrected, the penalty applies each year the excess remains in the account. Form 5329 is used to report and calculate this penalty. Proper documentation is essential, as the IRS may request verification of contributions and distributions to ensure compliance.