There's the version of tax resolution the late-night commercials sell you. Then there's how it actually works. I'm Darrin Mish, a Tampa tax attorney. I've spent 32 years on the inside of these cases. Here's the real version.
The Federal Insurance Contributions Act (FICA) stipulates that all employers and employees must contribute 12.4% of annual income must be paid for Social Security tax and 2.9% into Medicare up to a total of $113,700. These funds are for financial and health welfare of all salaried workers. While there is a cap on your salary below which you are obligated to contribute to Social Security, there is no such cap for Medicare contributions, meaning no matter how much you earn, you still have to contribute to Medicare.
As a salaried worker, you pay only half the FICA bill i.e. 6.2% for Social Security plus 1.45% for Medicare, while your employer contributes the rest. This tax is automatically withheld from your salary every month.
In this article, I’m going to assume you are the employer with some staff members you are responsible for. As an employer, you are to make the correct withholding on your employees’ salaries. But it is not uncommon for human errors to creep into the calculations for withholding. If the error is discovered within the same tax year, it is quite easy to rectify. But more often than not, this is not the case. When the error is discovered in the following year(s) after the wage payment, the process for correcting it may not be so straightforward. The way to do so would depend on whether the error is an overpayment or underpayment.
Let’s consider how to amend underpayments. If you as an employer fail to make a withholding of an employee’s FICA taxes in either a current or a subsequent year, you can make an adjustment when the error is discovered to the quarter in which the underpayment occurred. Use Form 941- X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund to make the correction.
On the other hand, if you discover the error after the calendar year when wage was paid, you should also provide the employee and the Social Security Administration a corrected Form W-2 (Form W-2c) that shows the additional FICA earnings, if applicable, for the prior year and FICA tax withholding as if you had made it correctly.
These regulations allow you to recover the FICA tax from your employee’s pay that you paid on the employee’s behalf. If you do not recover the amount from your employee, the payment of FICA tax you made is current wage compensation subject to FICA and income tax withholding and is reflected on the employee’s year-end Form W-2.
So that’s what to do in the event of underpayment of FICA taxes. Tomorrow I shall write about what to do about overpayment.