FICA Tax: What Does It Mean and How Is It Calculated?

Employees cannot deduct their FICA payments.

Employers must calculate FICA on employees' tips reported to them. They are also liable for the employer share of FICA on tips that are not reported to them. This liability doesn't arise until the IRS lets you know about them. There are voluntary tip compliance programs for certain industries:

• Tip Reporting Alternative Commitment (TRAC)
• Tip Rate Determination Agreement (TRDA)
• Gaming Industry Tip Compliance Agreement (GITCA)

If the amount of tips used to calculate FICA exceeds the federal minimum requirement, you may be eligible for a FICA tip credit.

Withholding FICA and depositing it with the government is only part of employer responsibilities for this tax. Additional responsibilities include:

• Filing employer tax returns (either quarterly or annually if you're a very small employer) to report FICA.
• Reporting Social Security and Medicare tax payments on employees' Form W-2.

Employers have no FICA responsibilities with respect to independent contractors or workers who are employees of another company (e.g., temporary workers who are employed by the temp agency).

There's an additional Medicare tax on earned income of high earners. Specifically, employers must withhold 0.9% when an employee's compensation exceeds $200,000, regardless of the individual's filing status. There is no comparable employer tax payment; the withholding is only on the employee side. The employer cannot deduct any of this tax because it's paid entirely by the employee; it's merely an employer responsibility to do the withholding.

Self-employed individuals do not pay FICA. Under the Self-Employed Contributions Act (SECA), which came into effect in 1954, self-employed individuals pay a comparable amount of FICA through self-employment tax to cover their Social Security and Medicare obligations. More specifically, self-employed individuals pay the employee and employer share (even though they are neither employees nor employers). One-half of self-employment tax is deductible by self-employed individuals from their gross income (no itemizing is required).

Each employer must withhold the employee's share and pay the employer's share of FICA for each worker on the payroll. However, if a business is related to another corporation and an employee works for more than one of these businesses at the same time ("concurrent employment"), there's a tax strategy for the employer to save money, known as the "common paymaster rule."

To use the common paymaster rule, the parties must be related. For purposes of this rule, these parties are related if any of the following four conditions are met:

1. The corporations are members of a controlled group of corporations (this is based on stock ownership).
2. If the corporation doesn't issue stock, then at least 50% of the board of directors of one corporation is on the board of directors of another corporation, or at least 50% of the voting power to select such members are concurrently held by holders of more than 50% respect to the other corporation.
3. Fifty percent of the officers of one corporation are also officers of the other.
4. Thirty percent of employees of one corporation work concurrently for the other(s). If the related corporations agree, they can designate which one is treated as the employer, referred to as the "common paymaster," for purposes of FICA withholding. This common paymaster is responsible for FICA on the employee's wages, regardless of whether the employee receives a consolidated payment at multiple corporations or several paychecks for this work. However, all corporations in the group remain jointly and individually liable for this payroll tax.

If you over-withhold FICA from an employee's pay, you should take steps to correct the problem. Here are the options:

• Refund the excess withholding to the employee. This can be done by taking out less from the employee's paycheck to offset the excess withholding. This is usually a good option.
• File a claim with the IRS to recoup the excess payment. This may be necessary if the employee is no longer on your payroll and there are no other options to adjust future withholding.

Use Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, or Form 944-X, Adjusted Employer's Annual Federal Tax Return or Claim for Refund to make the make an adjustment in withholding or a claim for refund. If you do nothing, the employee can claim the excess payment as a tax credit on an income tax return.

As an employer, you must deposit FICA and make reports about these taxes to the IRS.

• Depositing FICA. You must electronically deposit all of your payroll taxes, including FICA. There is a very limited exception for small employers with total annual payroll taxes — FICA and income tax withholding — of $1,000 or less for the full year. These employers can pay by check. The deposit schedule depends on the size of your payroll.
• Reporting FICA to the IRS. Usually you report FICA payments — withholding from your employees as well as your own — four times a year on Form 941. Again, small employers may be permitted by the IRS to file annually on Form 944.
• Reporting FICA to employees. The amount of FICA withheld from a paycheck should be reported to the employee on the pay stub. It must also be reported on the employee's Form W-2.

FICA and Social Security aren't synonymous, but they are related. FICA includes the combined taxes withheld for Social Security and Medicare. FICA taxes collected by the government help fund Social Security and Medicare programs.