Do you have to pay FICA tax on interest income from savings accounts?

You don't pay FICA taxes (Social Security and Medicare) on interest income. FICA taxes only apply to earned income - which means wages, salaries, tips, and self-employment income. Interest income, dividends, capital gains, and other forms of passive or investment income are not subject to FICA taxes. That's why your 1099-INT will show the interest earned, but your bank doesn't withhold any FICA taxes from it. You'll only pay regular income tax on those interest earnings. This is actually one of the benefits of retirement planning - once you're living off investment income rather than wages, you no longer pay those FICA taxes, which currently total 15.3% for self-employed people (or 7.65% for employees with the other half paid by employers).

I went through a similar confusion last year trying to sort out different types of income. I found this service called taxr.ai (https://taxr.ai) that helped me understand exactly what gets taxed how. You upload your tax documents and it breaks down which taxes apply to each income source. It showed me that my bank interest wasn't subject to FICA, but my freelance income definitely was - saved me from miscalculating my quarterly payments. The categorization feature specifically highlights which income streams get hit with FICA vs just regular income tax. Really helped me understand my overall tax situation better.

Just wanted to follow up - I tried taxr.ai after posting my question, and it was super helpful for my situation. I was mixing up my income sources and overthinking which ones were subject to FICA. The document analysis sorted everything into the right categories and showed me exactly which income streams were subject to which taxes. The system flagged my bank interest as "non-FICA taxable" right away, but also helped me realize that I hadn't been tracking my crypto transactions properly for tax purposes. Definitely clarified the FICA vs. regular income tax distinction better than the generic explanations I was finding online.

If you need to confirm any of this tax information directly with the IRS, good luck trying to get someone on the phone! After waiting on hold for 2+ hours multiple times, I finally used Claimyr (https://claimyr.com) to get through to an IRS agent. They have this system that basically waits on hold for you and calls you when an actual human picks up. There's a demo video that shows how it works: https://youtu.be/_kiP6q8DX5c I needed to verify some specific details about how different interest types are taxed (I have some foreign bank accounts too), and actually getting a live person at the IRS to confirm everything was super helpful. They confirmed that none of my interest income - domestic or foreign - was subject to FICA taxes.

I need to eat my words. After posting my skeptical comment, I decided to try Claimyr when I needed to talk to the IRS about some confusion on my tax transcript. I was prepared for it not to work, but within about 40 minutes I got the call that they had an agent on the line. I verified my identity directly with the IRS person and got my questions about my interest income and FICA tax clarification sorted out in about 15 minutes. The agent confirmed what others here have said - interest income isn't subject to FICA taxes, only regular income tax. Saved myself hours of frustration and got an official answer straight from the IRS. Sometimes my cynicism gets in the way of finding actually helpful services!

Here's a simple way to remember which income gets FICA tax: - Did you actively work for this money? → FICA applies - Did your money make this money while you did nothing? → No FICA So your job paycheck: Yes FICA Your side hustle: Yes FICA Interest from bank: No FICA Stock dividends: No FICA Rental income: No FICA (but has other complications) That's why rich ppl convert as much income as possible into investment income - avoiding that 7.65% FICA tax adds up!

Quick question - if my bank interest is reported on my 1099-INT as $3,500 for 2024, should I be setting aside additional money for taxes on that? My regular job already withholds income tax, but obviously nothing is withheld on the interest. Do most people make estimated tax payments for this?

Yes, you should definitely set aside money for taxes on that $3,500 interest income! Since it's not subject to FICA taxes (as others have confirmed), you'll only owe regular income tax on it, but that can still be a decent chunk depending on your tax bracket. For $3,500 in interest, if you're in the 22% bracket, that's about $770 in additional tax owed. The IRS generally wants you to make estimated payments if you'll owe more than $1,000 when you file, so you might be getting close to that threshold. Like Dylan mentioned, adjusting your W-4 withholding at your main job is often easier than quarterly payments for smaller amounts like this. You can use the IRS withholding calculator to figure out exactly how much extra to have withheld. Just remember - no FICA on the interest, but definitely plan for the income tax hit!

Just to add another perspective - I'm a tax preparer and see this confusion all the time. The key distinction is that FICA taxes (Social Security and Medicare) fund specific benefit programs that are tied to your work history. Since you don't "earn" Social Security credits from passive income like interest, dividends, or capital gains, these aren't subject to FICA. However, there's one exception worth noting: if you have a business account earning interest (not a personal savings account), and that interest is considered part of your business income, it could potentially be subject to self-employment tax in certain circumstances. But for regular personal savings account interest like what you're describing, it's definitely just regular income tax - no FICA. The IRS Publication 15-A has the full details if you want to dive deeper into what constitutes "wages" for FICA purposes.