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Grow Your Business Finances

Employer Obligations Under Social Security (and Upcoming Changes)

SMB tax deductions
Credit: lOvE LovE/Shutterstock

Social Security is an important supplemental income that most Americans rely on in their older age. Both workers and employers pay into the system, so it can be used to support both retirees and seniors that are still working when they reach the eligible aid to begin claiming Social Security benefits.  

Employers have a specific set of obligations when it comes to paying their share of social security – it's a key component of an employer's federal payroll tax responsibilities under the Federal Insurance Contributions Act (FICA). Here's what you need to know as a small business owner about your FICA tax obligations and, specifically, Social Security. [Need tax software for your business? Check out our recommendations on our best picks page.]

FICA doesn't simply prescribe tax obligations that support social security, but also Medicare. Both workers and employers share these costs to guarantee supplemental income and health coverage in old age. FICA taxes include the withholding of employee compensation, as well as the payment of an employer's portion.

Employee compensation withholding:

  • 6.2 percent Social Security tax
  • 1.45 percent Medicare tax
  • 0.9 percent Medicare surtax on employees earning more than $200,000

Employer obligations:

  • 6.2 percent Social Security tax
  • 1.45 percent Medicare tax

"In addition to the payroll tax obligation, employers are required to report wages for each employee from whom income, Social Security and Medicare taxes are withheld, on Form W-2," Bill Goselin, compliance analyst for Paychex, told Business News Daily. "If an employer files more than 250 W-2s, they must be filed electronically. These must be filed with the SSA by January 31 of the following year."

For Social Security taxes, there is a maximum dollar amount that serves as a wage cap. In other words, employers are only responsible for withholding and paying Social Security tax on wages up to the cap. For 2018, the cap is $128,400. However, that number is likely to change in 2019, Goselin said.

"At the beginning of June, the Social Security Administration published their 2018 Annual Report of the Board of Trustees. In that report, they are projecting the 2019 Wage Base to be $132,300," Goselin said. "A final determination will not be made until the fall of 2018."

According to Goselin, that change could increase an employer's overall FICA expense. The best way to prepare for this shift, he added, is to begin figuring the maximum possible change into your budget projections for next year. Businesses that will be affected are those that pay employees between the existing wage cap of $128,400 and the new possible maximum of $132,300.

"To prepare, employers should be aware of the yearly change to in the social security maximum," Goselin said. "They should evaluate the potential 2019 change and determine employees either at or likely to be at [those] income levels … so that they can budget accordingly for the additional FICA tax spend they may experience."

Calculating the amount that should be withheld from an employee's compensation for Social Security tax purposes is relatively easy. Simply multiply your employee's gross wages by the tax rate of 6.2 percent. The same amount you withhold from an employee's compensation is the amount you must pay in Social Security tax for that employee.

For example, if employee Jim receives gross wages equal to $100,000 annually, an employer must withhold $6,200 from Jim's pay over the course of that year. The employer would be responsible for paying $6,200 as well, in addition to the amount withheld from Jim's paycheck.

Employer's must do this for each employee. In another example, if an employer has 10 employees working under them for gross annual wages of $100,000 each, the employer must contribute $6,200 for each employee's Social Security tax. That means the employer would owe a total of $62,000 for the year in Social Security tax, while each employee would have an additional $6,200 withheld from their paycheck. This hypothetical business, then, would be contributing a total of $124,000 toward the Social Security tax in a given year.

Failing to comply with your FICA tax obligations can be costly, and even criminal. Initially, businesses that did not fulfill their FICA tax obligations will be required to pay what they owe, plus a financial penalty ranging between 2 and 25 percent, depending on how overdue the payment is.

Employers who willfully neglect their obligations and chooses to not withhold or pay anything toward their Social Security tax could find themselves on the hook for all the taxes owed, a 100 percent financial penalty, as well as criminal charges and prison time.

Paying your FICA tax obligations is as important as fulfilling any other tax obligation under the law. Failing to do so is illegal and bound to cost you more than you would save by ignoring your tax liability. To ensure you pay your taxes properly, consider enlisting the help of a CPA. You can also use payroll software to help keep track of your employees' compensation and tax software to calculate your obligations.

Adam C. Uzialko

Adam C. Uzialko, a New Jersey native, graduated from Rutgers University in 2014 with a degree in Political Science and Journalism & Media Studies. In addition to his full-time position at Business News Daily and Business.com, Adam freelances for a variety of outlets. An indispensable ally of the feline race, Adam is owned by four lovely cats.