Is FICA Taken Out of Pension Checks?

As you transition from a regular paycheck to receiving pension payments, the way taxes are handled also changes. A frequent point of confusion for retirees is which taxes apply to their pension income. This article clarifies how pension payments are treated for tax purposes and what deductions you can expect.

FICA Taxes on Pension Income

Pension payments are generally not subject to Federal Insurance Contributions Act (FICA) taxes. FICA is a U.S. federal payroll tax composed of two separate taxes: a 6.2% Social Security tax and a 1.45% Medicare tax, paid by both employees and employers on earnings. For 2025, the Social Security portion applies to wages up to $176,100, while the Medicare portion applies to all wages without a limit. The reason for this exemption is the distinction the Internal Revenue Service (IRS) makes between earned income and retirement distributions.

FICA taxes are levied on wages, salaries, and other compensation for services performed, which is considered earned income. Pension payments are classified as retirement distributions, not as wages for current services. Instead, they represent funds that were set aside during your working years.

Contributions to your pension plan were made from income already subject to FICA taxes when it was earned. Since you and your employer contributed from your salary, which had FICA taxes withheld, taxing the distributions again would be double taxation. For this reason, the IRS exempts these payments.

An exception exists for pensions from certain state or local government jobs where the employer did not withhold FICA taxes. If you receive a pension from such “noncovered” employment, it may affect your Social Security benefits. However, the pension payments themselves are still not subject to FICA withholding upon distribution.

Federal Income Tax on Pension Payments

While your pension checks are free from FICA tax deductions, they are not entirely tax-free. Pension income is generally considered taxable income by the federal government. This means the money you receive is subject to federal income tax at your ordinary income tax rates, similar to wages earned during your career.

The specific amount of your pension that is taxable depends on the type of pension plan and whether you made any after-tax contributions to it. If your pension was funded entirely with pre-tax dollars, which is common for traditional pension plans, then your distributions are fully taxable. If you contributed after-tax money to your plan, a portion of your distributions may be considered a tax-free return of your principal.

Your pension payer reports the total and taxable amount of your payments for the year on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form is sent to you and the IRS annually and is used to report pension income on your federal tax return.

In addition to federal income tax, your pension may be subject to state income tax. State tax laws on retirement income vary widely, with some states fully taxing pension income, some offering partial exemptions, and a few having no income tax.

Managing Your Pension Tax Withholding

You have control over how much federal income tax is taken from your pension checks using IRS Form W-4P, Withholding Certificate for Pension or Annuity Payments. Your pension plan administrator provides this form when you begin receiving payments. You can submit a new Form W-4P at any time if your financial situation changes.

On Form W-4P, you provide your filing status and can account for multiple income sources, dependents, and other adjustments. This helps calculate the appropriate withholding amount to align with your actual tax liability for the year. This reduces the chance of a large tax bill or refund when you file your return.

You can choose to have a specific additional dollar amount withheld from each payment. This is a useful option if you have other sources of retirement income, like from an IRA or part-time work, and want to cover that tax liability. Conversely, you can also elect to have no income tax withheld at all by indicating this on the form.

If you choose not to have taxes withheld, or if the amount is insufficient, you may need to make quarterly estimated tax payments to the IRS using Form 1040-ES. Failing to pay enough tax throughout the year through either withholding or estimated payments can result in underpayment penalties.