Yes. If you work for the government, you pay taxes on your wages the same way private-sector workers do: federal income tax, Social Security tax, and Medicare tax come out of each paycheck, and you file a return each spring using the W-2 your agency issues.1U.S. General Services Administration. Explanation of 2025 IRS Form W-2, Wage and Tax Statement Federal tax law defines “employee” to include officers and employees of the United States, every state, and any local government entity.2Office of the Law Revision Counsel. 26 U.S. Code 3401 – Definitions The details shift depending on which government you work for and which retirement system covers you, and a few carve-outs apply to military pay and to certain state and local positions.
The Baseline Withholding on a Government Paycheck
Social Security tax is 6.2% of gross wages up to an annual cap, which is $184,500 in 2026.3Social Security Administration. Contribution and Benefit Base Once your year-to-date earnings hit that number, Social Security withholding stops for the rest of the year. Medicare tax is 1.45% of all wages with no cap.4Social Security Administration. What is FICA? Your employer matches both, so twice what appears on your pay stub is actually flowing into those programs on your behalf.
If your wages pass $200,000 in a calendar year, your employer withholds an additional 0.9% Medicare tax on the excess. There is no employer match on that piece.5Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
Federal income tax withholding follows the W-4 you filed. State income tax withholding depends on where you live and work. Nine states have no broad personal income tax on wages; the rest run top marginal rates from roughly 2.5% to over 13%. If you cross a state line for your government job, a reciprocity agreement may let you owe tax only in your home state; without one, you generally pay the work state and claim a credit at home.
Federal Civilian Employees
Which retirement system covers you determines whether Social Security tax comes out of your pay.
FERS Pays Social Security, CSRS Does Not
Nearly all federal civilians hired on or after January 1, 1984, are under the Federal Employees Retirement System, which builds Social Security into the plan alongside a basic annuity and the Thrift Savings Plan.6U.S. Office of Personnel Management. FERS Information FERS workers pay the standard 6.2% Social Security tax and 1.45% Medicare tax.7Social Security Administration. Social Security Benefits for Federal Workers
A shrinking group hired before 1984 remained under the older Civil Service Retirement System. CSRS employees pay no Social Security tax on their federal wages, so those wages generate no Social Security credits. They do pay Medicare tax, and they contribute between 7% and 8% of pay toward the CSRS pension.8U.S. Office of Personnel Management. CSRS Information
Pre-Tax Health Premiums and TSP Contributions
Federal employees in the Federal Employees Health Benefits program have their premiums deducted pre-tax through premium conversion. That lowers taxable income for federal income tax, Social Security tax, Medicare tax, and usually state and local income tax. It runs automatically unless you opt out.9eCFR. Part 892 Federal Flexible Benefits Plan: Pre-Tax Payment of Health Benefits Premiums
The Thrift Savings Plan works like a 401(k), with a 2026 contribution limit of $24,500 in traditional pre-tax or Roth after-tax dollars, plus catch-up amounts at age 50 and higher amounts for workers turning 60 through 63.10Thrift Savings Plan. 2026 TSP Contribution Limits Traditional contributions cut this year’s taxable income and are taxed at withdrawal. Roth contributions give no break today but produce tax-free qualified withdrawals later.
State and Local Government Employees
Roughly a quarter of state and local government workers are not in the Social Security system. If your position is covered by a qualifying public retirement system, your employer may have opted out of Social Security entirely, and your retirement income comes from the public pension instead.11Internal Revenue Service. State and Local Government Employees Social Security and Medicare Coverage
States can bring positions into Social Security through a Section 218 agreement with the Social Security Administration. These agreements cover positions, not people, so if your position is covered, you pay.12Social Security Administration. Section 218 Agreements Federal law also made Social Security mandatory starting July 2, 1991, for state and local employees who are neither in a qualifying public retirement system nor under a Section 218 agreement.11Internal Revenue Service. State and Local Government Employees Social Security and Medicare Coverage
Medicare is a tighter net. Medicare coverage became mandatory for state and local employees hired after March 31, 1986. Workers hired before that date can remain exempt only if they have been continuously employed by the same government employer since then and belong to a qualifying retirement system.11Internal Revenue Service. State and Local Government Employees Social Security and Medicare Coverage Almost everyone else pays it.
Many state and local governments offer 457(b) deferred compensation plans. The 2026 contribution limit is $24,500, with the same age-based catch-ups as the TSP.13Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 One quirk worth knowing: if you leave government before age 59½, you can withdraw from a governmental 457(b) without the 10% early withdrawal penalty that applies to 401(k) and TSP distributions.
Military Pay
Base Pay Is Taxed, Allowances Are Not
Basic military pay is subject to federal income tax, Social Security tax, and Medicare tax. But a large share of a service member’s total compensation arrives as tax-free allowances. Basic Allowance for Housing and Basic Allowance for Subsistence together average over 30% of a typical service member’s regular cash pay, and both are exempt from federal income tax as well as Social Security and Medicare taxes.14Military Compensation and Financial Readiness. Tax Exempt Allowances
Combat Zone Exclusion
Service members serving in a designated combat zone get a substantial income tax break. Enlisted members, warrant officers, and commissioned warrant officers can exclude all military pay earned during any month they serve in a combat zone.15Office of the Law Revision Counsel. 26 USC 112 – Certain Combat Zone Compensation of Members of the Armed Forces Commissioned officers face a cap set at the highest enlisted basic pay rate plus hostile fire or imminent danger pay for the qualifying month. The exclusion covers basic pay, reenlistment bonuses, leave sold back, and student loan repayments earned during combat zone service, though Social Security and Medicare taxes still apply.16Internal Revenue Service. Tax Exclusion for Combat Service
State Residence for Military Families
Military members owe state income tax only to their state of legal residence, regardless of where they are stationed. Spouses can elect to use the service member’s state of legal residence for their own income tax, even if they have never lived there.17Military OneSource. Military Spouses Residency Relief Act
Active-duty members can also deduct unreimbursed permanent-change-of-station moving expenses on Form 3903, an above-the-line adjustment available even if you take the standard deduction.18Internal Revenue Service. Moving Expenses for Members of the Armed Forces and the Intelligence Community Congress eliminated this deduction for civilians after 2017 but kept it for the military.
WEP and GPO Are Gone
For decades, two provisions cut Social Security benefits for people who earned pensions from government jobs not covered by Social Security. The Windfall Elimination Provision reduced your own benefit if you also worked in a covered job. The Government Pension Offset cut spousal or survivor benefits by two-thirds of your government pension. Both hit teachers, police officers, firefighters, and federal CSRS retirees hardest.
The Social Security Fairness Act, signed on January 5, 2025, repealed both provisions retroactive to benefits payable after December 2023.19Social Security Administration. Social Security Fairness Act: Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) Update The Social Security Administration is recalculating affected benefits and processing back payments, and some retirees are seeing increases of over $1,000 per month.
Public Service Loan Forgiveness Stays Tax-Free
Government workers at every level qualify for Public Service Loan Forgiveness after 120 qualifying payments on federal student loans while working full-time for a qualifying employer. The forgiven balance is not federal taxable income, and that exclusion is written permanently into the tax code for forgiveness based on working for a qualifying employer for a required period.20Office of the Law Revision Counsel. 26 U.S. Code 108 – Income From Discharge of Indebtedness
The timing matters. Under the American Rescue Plan Act, all student loan forgiveness was temporarily tax-free through the end of 2025. Starting in 2026, forgiveness under income-driven repayment plans after the 20- or 25-year period is once again treated as taxable income at the federal level.21Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not? PSLF forgiveness stays tax-free regardless. State treatment can differ, so confirm your state’s rules before assuming nothing is owed.
If You Get a 1099 Instead of a W-2
Everything above assumes you are classified as an employee. If a government agency treats you as an independent contractor, no federal income tax, Social Security tax, or Medicare tax is withheld from your pay.22Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? You pay self-employment tax instead, which covers both the employee and employer sides of Social Security and Medicare at an effective 15.3% on net earnings, compared with 7.65% for employees. You also owe quarterly estimated tax payments.
Classification depends on how much control the agency has over when, where, and how you do the work, not on the label in your contract. A 1099-NEC at year-end means contractor treatment; a W-2 means employee. If you think you have been misclassified, the IRS has a process for disputing it, and the tax difference is large enough to be worth pursuing.