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Employer Obligations Under Social Security (and Upcoming Changes)

Adam Uzialko
Adam Uzialko
Freelance Editor

Social Security is a public fund first established as part of the New Deal under President Franklin Delano Roosevelt in 1935. It has since become an important component of Americans' income in their older age and retirement. Both workers and employers pay into the system, but without any changes, Social Security is headed for insolvency by 2034. Undoubtedly, beneficiaries would have to shoulder steep cuts prior to that deadline, and the future of the program for younger workers would be wholly unclear.

However, Congress is likely to act before insolvency becomes a problem. There is currently a proposal in the House of Representatives that would lift the cap on income subject to Social Security taxes, as well as gradually increase the overall Social Security tax rates that both workers and employers pay into the system.

Regardless of what changes loom, employers have a specific set of obligations for paying their share of Social Security. It is critical for employers to understand their 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, as well as what changes could be on the horizon for the program. [Need tax software for your business? Check out our recommendations on our best picks page.]

What are my FICA tax obligations?

FICA doesn't only 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," said Bill Goselin, compliance analyst for Paychex. "If an employer files more than 250 W-2s, they must be filed electronically. These must be filed with the SSA by Jan. 31 of the following year."

The Social Security wage cap

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 2019, that cap is $132,900, but that could soon change.

A proposal in the House of Representatives would increase the cap to $400,000 in annual earnings. Currently, someone who earns $400,000 annually pays the same in Social Security taxes as someone who earns $132,900 annually. The bill would change that, as well as slowly increase the payroll tax rate from 12.4 percent total to 14.8 percent total; employees would contribute 7.4 percent, and employers would match that amount.

According to Goselin, the 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.

"To prepare, employers should be aware of the yearly change to the Social Security maximum," Goselin said. "They should evaluate the potential 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."

How to calculate Social Security tax obligations

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, which is currently 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 in addition to the amount withheld from Jim's paycheck.

Employers 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 and its employees, then, would contribute a total of $124,000 toward the Social Security tax in a given year.

Penalties for noncompliance

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

Employers who willfully neglect their obligations and choose not to 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 keep track of your employees' compensation and tax software to calculate your obligations.

Image Credit: lOvE LovE/Shutterstock
Adam Uzialko
Adam Uzialko
Business News Daily Staff
Adam Uzialko is a writer and editor at business.com and Business News Daily. He has 7 years of professional experience with a focus on small businesses and startups. He has covered topics including digital marketing, SEO, business communications, and public policy. He has also written about emerging technologies and their intersection with business, including artificial intelligence, the Internet of Things, and blockchain.