Employers are required to withhold FICA taxes from employees and submit the withholdings to the Internal Revenue Service. Additionally, employers must pay in a share of FICA tax on employees' wages. Whether through ignorance of the law or willful disregard, an employer may fail to meet this responsibility.
The employee usually won't have a penalty for not paying Social Security tax and Medicare tax. However, there will be taxes owed. Fortunately, there are numerous ways to remedy the situation when the employer did not withhold FICA taxes. The remedy chosen will dictate how the employee should proceed with their tax filing.
Federal Insurance Contributions Act
FICA is an abbreviation of the Federal Insurance Contributions Act. The taxes taken out of your paycheck as a result of this act fund Social Security and Medicare, programs that provide retirement or disability income and health care benefits for elderly or disabled Americans. FICA was established along with the creation of the Social Security program in 1935 and revised to include Medicare after its establishment in 1965. When originally written in 1935, the provisions detailing Social Security benefits were contained in Title II of the act, while the tax provisions were in Title VIII. In 1939, amendments to the act moved the taxing provisions of Title VIII into the Internal Revenue Code. The enforcement of FICA tax payments, therefore, rests with the Internal Revenue Service.
Employer Responsibilities
Employers are required to accurately report employee wages and taxes withheld. They must file Form 941, Employer's Quarterly Federal Tax Return. Additionally, they are expected to deposit all withheld amounts as well as the employer's share of FICA taxes in a timely manner. A failure to correctly report and pay FICA taxes can result in both civil and criminal penalties for employers. Late deposits can incur a penalty from 2 percent to 15 percent of the tax due, depending on how many days past due the payment is received. Employers who willfully fail to deposit withheld taxes can be charged a penalty of 100 percent of the tax owed, effectively doubling the employer's liability.
FICA Tax Rates
FICA tax rates are published by the IRS in Publication 15, Circular E, Employer's Tax Guide. FICA taxes are shared equally by employer and employee. The Social Security portion as of 2021 is 12.4 percent, or 6.2 percent each for employer and employee, on all earnings up to the base rate. In 2021, the base rate is $142,800. Earnings beyond that amount per employee are not subject to the Social Security tax.
The Medicare portion of the tax is 2.9 percent, or 1.45 percent each for employer and employee. All wages are subject to the Medicare portion, with no upper limit. An additional 0.9 percent is withheld for Medicare when an employee's wages exceed $200,000. The employer does not match this additional amount.
Exemptions from FICA Taxes
Some individuals are exempt from FICA taxes. Certain religious groups are opposed to Social Security benefits. Members of such groups that were established prior to 1950 can complete Form 4029 to be exempt from the tax.
Nonresident alien teachers in the United States on a temporary basis do not pay FICA taxes. Nonresident students who are employed as a part of their college enrollment may be exempt. Also, nonresidents who work for a foreign government in the United States are exempt.
Employee Responsibilities
Ultimately, the employee is responsible for their share of FICA taxes. This means that if your employer does not withhold the taxes from your pay, you will report your earnings and pay the tax when you file your annual income tax return. For many employees, finding out at tax time that they owe several thousand dollars to the IRS would be not only unpleasant but also a serious financial burden. It is, therefore, in employees' best interest to ensure their wages are reported correctly with taxes being withheld. Employees who have concerns about withholding that their employer fails to address can report to the IRS by calling 800-829-1040.
Earning Under the Table
Some employers might offer to pay you "under the table," meaning they skip the burden of reporting and depositing withholdings and let you skip out on paying Uncle Sam. This arrangement puts both the employer and employee at risk. The employer is at risk of being discovered in an audit and facing nasty penalties for not having correctly reported wages and paying applicable taxes. The employee is at risk of losing Social Security, Medicare or unemployment benefits because of unreported or under-reported wages.
Making It Right
When the employer discovers that there has been an error in calculating or depositing FICA taxes, they have several ways to address the situation. If the employer did not withhold FICA taxes, or withheld less tax than they should have, and it is still within the same calendar year, the employer can adjust withholdings in future pay periods so that the withholding is correct by the end of the year. Another option would be to reach an agreement with the employee that they will be responsible for the under-withheld amount at tax time. If the calendar year is over, the employer may find it necessary to deposit the correct amount and include the amount paid of the employee's share as wages on their W2.
The employee's responsibility to remedy the situation is to ensure that the tax is paid. If the employer corrected the problem and remitted the tax, they will need to issue a W2-C Corrected Wage and Tax Statement to show the withheld FICA tax. The employee should use a W2-C rather than the original W2 for filing taxes. If the employer does not remit the tax on the employee's behalf, the employee will calculate the tax owed on their income tax return and pay it directly to the IRS with any other tax owed. Taxpayers who typically receive a refund will see that refund reduced by the owed amount. As long as the taxes are filed and paid on time, the employee shouldn't receive a penalty for not paying Social Security tax through withholdings from their wages.
Contract Labor and 1099 Earnings
Contract laborers are considered self-employed when it comes to individual income tax reporting. If you receive a 1099, expect to be responsible for both employer and employee portions of FICA tax. This self-employment tax represents the full amount of 15.3 percent of self-employed earnings. Because this tax can be quite large, self-employed individuals are strongly encouraged to make quarterly estimated tax payments to the IRS. These payments are due for calendar-year taxpayers in April, June and September of the tax year, with the fourth-quarter payment being due in January of the following year.
The IRS does assess a penalty for not paying estimated taxes. This penalty is calculated on Form 2210, submitted with the tax return. Taxpayers who did not have a tax liability in the prior year can avoid this penalty. Additionally, those who owe less than $1,000 will avoid the penalty. Those who fail to send estimated payments of at least 90 percent of the tax owed in the current year or 100 percent of the tax owed in the prior year will be assessed a penalty.
