FICA Tax Issues
The Federal Insurance Contributions Act (FICA) is a United States federal payroll tax that funds Social Security and Medicare programs. FICA is a cornerstone of U.S. social welfare, mandating contributions from employees and employers. Understanding and complying with FICA tax obligations is not just a legal requirement, but also a powerful tool that can help you avoid penalties and ensure financial stability. Among other tax matters, Azarvand Tax Law counsels clients on the complexities of Federal Insurance Contributions Act (FICA) tax issues. , empowering them with the knowledge they need to navigate these obligations.
For employers subject to FICA tax requirements, accurate reporting is not just a task, it’s a crucial responsibility. Additionally, employers with FICA taxes must pay semi-monthly/monthly Federal Tax Deposits. Late payments can result in hefty Failure to Deposit Penalties (in addition to any applicable Failure-to-Pay penalties, which cap at 25% of the unpaid tax), including:
1-5 days late: 2% of late payroll tax deposits- 5-16 days late: 10% of late payroll tax deposits
- 16+ days: 10% if you pay within 10 days of the IRS’s first notice, OR
- 16+ days: 15% if you pay 10 or more days after the date of the IRS’s first notice
Form 941, the Employer’s Quarterly Federal Tax Return, is the tool used by most employers to report income taxes, Social Security tax, and Medicare tax withheld from employees’ wages.
Penalty Abatement
Penalties eligible for penalty relief include: (1) Information Return; (2) Failure to File; (3) Failure to Pay; (4) Accuracy-Related; (5) Failure to Deposit; (6) Dishonored Check; (7) Underpayment of Estimated Tax by Corporations; (8) Underpayment of Estimated Tax by Individuals.
There are two methods in requesting penalty abatement on Failure to Deposit penalties:
Reasonable Cause Penalty Abatement (Must demonstrate that Taxpayer exercised ordinary care and prudence and were nevertheless unable to file return/pay the taxes on time. Examples of valid reasons for failing to file or pay on time may include: Fires, natural disasters or civil disturbances.); and
First Time Penalty Abatement (“FTA”) (Taxpayer must not have any penalties assessed in the three-year period prior to the period that FTA is being requested for. Further, the taxpayer cannot have previously availed themselves of FTA.)
Who Must File Form 941
Generally, employers who withhold income, Social Security, or Medicare taxes from employee wages or who must pay the employer’s share of Social Security or Medicare taxes must file Form 941. However, there are some essential thresholds and exceptions:
Employers with annual employment tax liability of $1,000 or less may be eligible to file Form 944 annually instead of Form 941 quarterly. However, you must receive written notification from the IRS to file Form 944.
Seasonal employers who don’t have employees during one or more quarters of the year may check the “seasonal employer” box on Form 941 and only file for quarters when they have paid wages.
Household employers typically report household employee wages on Schedule H of Form 1040, not Form 941.
Employers with annual employment tax liability of $1,000 or less may be eligible to file Form 944 annually instead of Form 941 quarterly. However, you must receive written notification from the IRS to file Form 944.
Penalties for Non-Compliance
Failure to comply with FICA tax requirements can have serious consequences, including severe penalties. It’s crucial to understand these penalties and the importance of timely compliance to avoid unnecessary financial strain and potential damage to your business.
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Failure to File: The IRS charges a penalty of 5% of the total tax amount due for each month the return is late, up to a maximum of 25% (five months). -
Failure to Pay: An initial penalty of 0.5% of the unpaid tax amount is applied, with an additional 0.5% for each month the tax remains unpaid, up to a maximum of 25%. -
Failure to Deposit: Penalties for late deposits can range from 2% to 15% of the unpaid deposit, depending on how late the deposit is made. If a deposit is made more than 16 days late, the penalty will either be 10% or 15%, depending on whether or not a notice was issued from the IRS regarding the missing deposit.
These penalties can quickly accumulate, making timely compliance crucial for businesses of all sizes. Further, both tax underpayments and penalties are subject to interest at a rate of 8% (10% for large corporate underpayments), compounding daily. Navigating FICA Taxes with Professional Assistance.
Given the complexities of FICA tax compliance, many businesses benefit from professional guidance. Azarvand Tax Law focuses on helping employers navigate FICA tax issues, minimizing risks, and ensuring compliance. Our services include:
Assisting with proper employee classification
Seasonal employers who don’t have employees during one or more quarters of the year may check the “seasonal employer” box on Form 941 and only file for quarters when they have paid wages.
Household employers typically report household employee wages on Schedule H of Form 1040, not Form 941.
Providing guidance on complex FICA tax situations, such as those involving tipped employees or fringe benefits
Offering representation in FICA tax audits