Remember when you got your first paycheck and wondered why it was so small? All 16-year-olds hate FICA. 🙂
Even though it’s not included when we talk about marginal tax rates, all employees have to pay 6.2% of their gross income to Social Security and 1.45% for Medicare. (Double that for self-employed folks.) However, there is a limit for Social Security – the tax only applies to the first $97,500 of wages for 2007 ($6,045), no matter how many different sources it came from. The problem is, your employers have no idea what you’re making at your other jobs, or when you reach that cap.
I came across this WSJ article which tells you how to get any overpaid amount refunded back to you at filing time. Keep in mind it’s using cap values for 2006.
If you worked for two or more employers and had too much withheld, you can claim the excess as a credit.
Here’s a hypothetical example supplied by the IRS: Suppose you’re married and file jointly. Your spouse didn’t have any income last year. You worked for a company that paid you $58,000 during 2006 and withheld $3,596 (6.2% of $58,000) in Social Security tax. You also worked for another employer who paid you $47,000 and withheld $2,914 of Social Security tax (6.2% of $47,000).
Thus, the Social Security tax withheld totaled $6,510. That’s $669.60 more than you actually owe ($6,510 minus $5,840.40). So you’re entitled to a credit of $669.60. Enter it on Form 1040, line 67, or on Form 1040A, line 43.
I would assume that TurboTax or similar would catch this, but it’s definitely worth double-checking.
I was also trying to find online if you could direct your employer to stop withholding Social Security taxes if you “know” you’re over the limit already, but it seems like you can’t. They just keep withholding as if that was your only job. But what you can do is change your total tax withholding values (increase exemptions, etc.) in order to counteract this overpayment and reduce your future refund.
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Not every employer deducts for social security. I word for a public school system in metro-Atlanta and our school system opted out of contributing to social security when it began. Instead they created their own retirement system (still taking out 6.2%) that have given better returns than social security.
I’ve seen this happen a few times to some people. The unfortunate thing is that while the individual can get a refund, the company that matched the employee’s withholding can not.
However, it looks like if a person has a W-2 job and is self employed, which pushs them over the SS limit, then they just have to pay both halves of the SS tax to the limit.
Joe is reading blogs way too early in the morning, but he is exactly right. Working for my father-in-law I have to calculate all of my own withholdings. The law is clear that the employer must withhold up until the limit whether or not the employee has additional income from other sources. It seems like this is a way for gov’t to extract a little extra from employers since they would never know the employee reached the limit and thus would not ask for their contribution back.
Interesting post. I’ve worked for two companies this year, and the combined salary will put me over the limit of taxable income for SS, so I’m sure I’ll be doing this. Thanks for the info!
I can’t remember if we were using TurboTax or TaxCut the year my wife changed jobs in the middle of the year and this happened, but the software does indeed take care of filing for refund of excess Social Security taxes.
You cannot have your employer stop withholding SS and Medicare when you reach the cap. But you can have your employer reduce your withholding of Federal Income taxes in an amount that would offset what you are still paying in income taxes. Since the excess SS taxes will serve as a credit toward income taxes, this effectively does the same thing as if you’d stopped the SS taxes. Just ask for and fill out a new W-4. Add enough exemptions to reduce or eliminate your federal withholding. You may need to look at the withholding tables online at irs.gov to determine how many exemptions to add. Don’t forget to fill out ANOTHER W-4 at the beginning of the new year to return your withholding to normal.
Mike
When you sign a W4 it says “Under penalty of perjury, I declare that I have examined this certificate and to the best of my knowledge and belief it is true, correct and complete.” Claim more allowances that you are entitled and you can get in trouble. At the very least the IRS will send your employer a “lock in letter” making you single and zero allowance forever.
Rich –
[Part-1:]
Of course you have to be truthful when completing your W4 and related worksheets, but (I know this will sound bizarre… ) that doesn’t mean you can’t claim more allowances on your W4 than the number of allowances you are entitled to claim on your tax return (1040).
Publication 505 (2014/2015):
https://www.irs.gov/pub/irs-pdf/p505.pdf
Page 5: How Do You Decrease Your Withholding?
If your completed Worksheets 1-5 and 1-7 show that you may have more tax withheld than your projected tax liability for 2015, you may be able to decrease your withholding. There are two ways to do this.
You can:
Decrease any additional amount you are having withheld, or
Increase the number of allowances you claim on Form W-4.
Use Worksheet 1-5 on page 18 to calculate “Projected Tax Liability”
Use Worksheet 1-7 on page 21 to calculate “Projected Withholding”
If your “Projected Withholding” is more than your “Projected Tax Liability”, you can decrease your withholding by:
1) Decreasing any additional amount you are having withheld
2) Increase the number of allowances you claim on Form W-4.
[Part-2:]
>> a “lock in letter” making you single and zero allowance forever.
First of all, a “lock in letter” is not likely to issued if your tax return shows an overpayment, or a small underpayment.
Second, if you are issued a “lock in letter” you can dispute the determination by provide a written statement to the IRS to support your claim. Your truthfully completed W4 and worksheets should be adequate to prove your claim.
Third, a “lock in letter” is not automatically for “single” and “zero allowances”. Depending on how much “unpaid back taxes” you owe (if any), the “lock in letter” could be anywhere from “single” and “zero allowances”, to your actual filing status and allowances that you are entitled to.
Fourth, a “lock in letter” is not forever (unless you never ask for it to be released). The “lock in letter” can be released (will be released) on request, if the taxpayer has been compliant (paid in full on time) for the most recent 3 tax returns following the date of the lock.
Internal Revenue Manul 5.19.11.7.3.2 (11-18-2013)
Release of Lock-in After Period of Continued Compliance
When contacted by the taxpayer, offer release of lock-in to those taxpayers who are tax compliant with all filing and payment requirements for the three tax years ending with the most recent return due. For withholding compliance purposes, a tax compliant taxpayer is defined as one who has filed all required returns and full paid all tax (i.e., Form 1040 liability), penalties, and interest on time.
Why do people always falsely say that self employed people pay double? That is simply not true. Everybody pays the same. Just because the other half never shows up on your pay stub does not mean that you don’t pay it.
I believe more than 16-year-olds hate FICA.
As someone who works in HR, this is a great article I’ll be sharing with my colleagues. Our payroll dept. is very adamant about not taking what was withheld from other employers into account when calculating the taxes on paychecks. People who have reached the limit at other employers are always concerned about overpaying the FICA taxes and want the employer to make the correction. So the more people that know how to go about getting the refund, the easier my job becomes 🙂
Nice post – it is wonderful to have to deal with such issues!
Employers are bound to withhold FICA until they themselves have paid an employee to the cap level.
If they did not withhold, it is possible that an employee could lie or mislead and avoid paying their FICA tax.
It just leads to a larger refund at tax time or a reduction of other taxes owed.
Tax is not my area of expertise, but I do not think overpaying FICA results in a “credit”, it is just excess withholding. Once tax liablitity is calculated the amount already withheld is compared to the taxes due. If too much was withheld the result is a tax refund. Tax credits are an entirely different ballgame.
This post does raise one question for me. In the example given, the two employers also overpaid FICA by $669.60 and I doubt either of them can claim a refund. Is this a hidden form of tax revenue?
Ted, I am not sure what you mean when you say everyone pays the same FICA. Being self employed, I get no employer match so I do end up paying twice the FICA. Unless you mean that the employer match is a consideration in your wage level?
Just a small correction: “all employees have to pay 6.2% of their gross income to Social Security.” Employees that pay into a government pension plan may not necessarily be required to pay social security tax.
how does this work if your spouse earns in excess of 97,500?
i.e. if you are married filing jointly, do you need to contribute up to the SS wage base of 97,500 or does your spouse’s income count for you too? I’m guessing that the SS tax is meant to be per person and thus the spouse probably doesn’t matter but I thought I’d ask.
That would be a great problem to have. I guess not having to pay FICA is a nice tradeoff for no longer being allowed to contribute to a Roth IRA and paying a much higher federal tax rate.
enonymous, the taxable wage base is per person. You are correct.
Changing your exemptions will not affect how much is withheld for FICA. It will only affect how much is withheld for State and Federal taxes. Also, when you have two employers you often end paying State and Federal tax at the end of the year because not enough was withheld during the year. The second job effectively pushes your total income into a higher bracket than either of the individual employers are withholding. So it is probably not a good idea to increase your exemptions if you hold two jobs.
Has anyone though about the story of John Beck and folks?
Do you expect that you can be rich by purchasing property tax forecloser sale?
Any comments and advice are welcome.
This exact situation happened to me. Employer 1 was withholding SS tax of a certain amount based on the rate for that year. Then I quit that job and in the same year started a new job with a different salary. Employer II withheld SS tax at the same rate (not taking into account my previous SS tax withholdings for Employer 1), but since the salary was higher for Employer II, I ended up withholding more for that year than I needed to.
I wouldn’t have even thought about the SS tax overpayment credit if a friend of mine hadn’t alerted me to it. Low and behold, there’s a line item on the 2nd page of the 1040 for excess SS payments. I had overpaid about $600.
Definitely worth checking…
Since it seems like Social Security is just another tax accounted for at tax time, you’d think it’d be okay to over- or under- withhold just like regular income taxes. But I suppose this way is more simple…
Interesting that some people are exempt from SS – I remember reading that before somewhere.
Yes, some people are exempt from Social Security tax because they contribute to another government retirement plan. (Typically your municipalities and schools do this, but may decide to go into the Social Security instead – it’s their election.) But one thing about not contributing to Social Security (especially if you’re going to the age of retirement) do not expect to get a social security check, instead you will have to withdraw from your governmental retirement plan like Social Security.
As to under/overpaying Social Security, Businesses have to pay in their portion for hiring the employee – they don’t receive benefits from SS ever (to my knowledge). It is an expense that the Business has to tack onto the employees wage requirements when they think of hiring them. Now, individuals can claim a refund for their portion, but individual owners who get paid as an officer/employee – their amounts are taken from the wages, and the company pays the rest.
I can see why there is a requirement to withhold, if there wasn’t and someone could not pay upfront they may never pay but they actually need to get a SS check when they retire based upon their pay. If we did it by how much got paid in per individual, you’d be talking a lot of paperwork and hassel – more so than the occasional time that someone has two jobs in one year and goes over the limit.
Just think, this is our retirement money that we will never see anyways! 🙂
Exemption from SS comes at a price, of course no SS unless you work enough somewhere non-exempt. Texas teachers are exempt (their own retirement plan) and the do NOT get their spouses SS should he/she kick the bucket first.
I would strongly advise against adjusting W-4’s to make up for the Social Security tax that’s withheld in excess of the $6,045. What you’re doing is offsetting your marginal income tax which could be taxed at a rate of about 28%, to get back what you will receive from your refund when you file your taxes. I don’t think the timing difference is worth the risk of increasing your withholdings too much…at the 25-, 28-, or 33% marginal rate, the potential to put yourself in a detrimental tax situation is too much to warrant adjusting your withholdings for Social Security. IMHO
“(Typically your municipalities and schools do this, but may decide to go into the Social Security instead – it?s their election.)”
But only if they elected to opt-out of SS prior to 1983. Before that, a local government unit could opt-out at any time it pleased; after the 1983 reforms, only the schools and municipalities who had previously opted out were allowed to stay out.
And there have been some efforts to eliminate those opt-outs and force those local governments into SS in more recent years.
“Texas teachers are exempt (their own retirement plan) and the do NOT get their spouses SS should he/she kick the bucket first.”
It’s not a total prohibition of benefits, but it is a reduction, and a potentially severe one at that. It also reduces the spouse’s benefit when the spouse is alive. It’s called the Government Pension Offset, and along with the Windfall Provision, it’s one of SS’s nastier rules.
I believe it is safe to say that I will never in my life have to worry about overpaying my Social Security tax.
Ugh, just another reason to hate FICA. Seriously, 12.4% of our income sitting in the governments pocket for how many years? Then, if you die at age 65, guess who keeps the money. Biggest scam ever pulled on the American people.
Large Talons – “…if you die at age 65, guess who keeps the money …”. Well, I would say, not the Government. They don’t “keep” anything, they always spend more than they take in. In this case, the amount that you would have received if you had not died, is paid to the person (people) that live beyond the normal life expectancy, like into their late 80’s and 90’s.
My job has been deducting more ss tax from my checks than federal! Is this right and why? My ytd for federal deduction stands @ a lilltle over $200 but my social security ytd totals nearly $800.00! Won’t this greatly affect my Income tax refund?
Turbo Tax catches this but displays an incorrect message. I was doing a first pass on my 07 taxes and found myself in this same situation. Unfortunately Turbo Tax said to go back to my current employer for a refund and a W2C. They of course have no idea on what to do.
Here is an interesting & slighly complicated twist on it: My wife and I have an adjusted gross income of >$150k, and she is self-employed. According to the 2007 requirements since our AGI is >$150k we would need to have withheld at least 110% of our prior year’s taxes to avoid any underpayment penalties. As it stands we paid $5K less in Federal Withholdings BUT I switched jobs in the middle of the year and ended up overpaying my SS tax by $5.5k and will obviously be due a refund. The question is: Can we assume that we will not have to pay an “underpayment” penalty on federal withholding, because I overpaid my social security? Or do I need to very quickly (deadline was 1/15) send the IRS a check for the $5k of Federal Withholdings?
THOUGHTS?
My reply will come a little late for you (okay, a lot late), but for future readers…
The “underpayment penalty” is triggered by whether or not your tax return shows you are due a refund, or you owe additional tax, at the time you file your tax return.
If you are due a refund, or if you owe a small amount that you will pay when you file your tax return, then you will not be subject to an “underpayment penalty”.
If the amount of tax that owe and pay when you file your tax return exceeds the limit than you will likely be subject to an “underpayment penalty” unless you can justify the underpayment.
Although it is accounted for separately, for the purposes of “underpayment penalty” liability, overpayment of SS tax is treated as though it is additional withholding or estimated tax payments.
Disclaimer…. I am not an accountant, and I don’t play one on TV. While it seems clear that if you are due a refund, you haven’t underpaid your taxes, your tax situation may be more complicated than that and you may want to consult a tax professional.
RE: DC
Go look at the penalty section of form 1040. If you witheld properly the year before, the range of under-witholding is pretty big – a few thousand dollars I think.
how about if employee is changing entity and reached max in one
enitity, should the new enitity withheld fica taxes??
FICA is one of FDR’s frauds. Thank you FDR! You were such a great president!… I hope you burn in hell somewhere right now, LOSER!
Anyway, back to the subject. Ok, so the question is – do employers get money back for overpaying on their employees or not? If they don’t – here’s another example of how the lovely US government robs us of our money. AGAIN! Oh, I’m so sick and tired of being a sheepie!
Nobody seems to have answered what happens to the company’s share of over payment? I own my company and realized I’ve overpaid substantially. Do I have any recourse?
FICA Hater, I agree with you. FDR made a fatal decision, but only we will be around to see the house of cards fall. Social Security is nothing more than a Ponzie scheme. Making financial promises to the first people to “invest” and taking it from the “investments” of the later people. It will ALWAYS fail. Madoff was just thinking like FDR. I am sick of being a Sheepie, too.
We overpaid SS in 2008, thanks for the great answers. Try to get an answer from irs.gov; all you’ll get is more legalese to keep the masses confused, overwhelmed, and compliant.
Where does one find definition of “Payer”, i.e. 941 Regular, etc.
As the line number change, so please see under “Payments” section for
“Excess social security and tier 1 RRTA tax withheld” in Form 1040 and may be line 67 in year 2007 tax form http://www.irs.gov/pub/irs-prior/f1040–2007.pdf , but was line 65 in year 2008
Let’s NOT call it overpayment but rather what it is – if you are lucky enough to make a bit more than the limit and happen to switch jobs in mid-year you/we are being compelled to make a non-interest paying loan to the Govenment. Yes, they will repay you when you file in the next calendar year, but in the interim you lose the use of your own money and for quite a lengthy bit of time, too.
This is a disgrace. The SS Administration has our number, they control eveything by those numbers, yet they cannot identify and help out once you hit your annual max? Sure they can, but these interest free loans do quite a bit to clean up their numbers and fiscal reporting too.
“Biggest scam ever pulled on the American people.”
“FICA is one of FDR’s frauds. … I hope you burn in hell somewhere right now, LOSER! … another example of how the lovely US government robs us of our money. ”
—
(1) SS has its faults, as do all taxes. My grandparents are 99. My gf paid taxes all his working life, served in WWII, never got in trouble, was an honorable citizen, saved money, etc. Upon retirement, he was advised to cash out his meager military pension (mistake in hindsight). They lived frugally, but healthily in retirement. They have now run out of money. The only thing that pays the bills is SS checks.
If we do away with SS, what do we do with the elderly that play by the rules, save, work hard, but still run out of money? Our family is small and not able to support numerous relatives, of course we would do what we had to do. So do we kick them out on the street? or send them to live with relatives of moderate incomes?
(2) We don’t have children, yet we pay property tax. Is the state/county government robbing me of money?
(3) I don’t use the roads to commute and I minimize my driving. I bike everywhere I can. Is the fed/state/local government robbing my of my money?
(4) I have hardly ever interacted with police, fire, rescue, etc., and can defend myself and my property. Is it fair to make me pay for those services in my taxes?
(5) I don’t think the Iraq war was a good idea. Should I get a tax refund?
What happens to the extra Social Security paid by your employers? Let’s assume (although it doesn’t have to be this way) that you changed jobs mid-year. You reach the max deduction in October and your new employer continues to deduct your half — and pay their half. I know I can get mine back (a year later with no interest mind you), but what about the extra the second employer paid?
Russ – “I know I can get mine back (a year later with no interest mind you)…”
Well, you wouldn’t have to wait a year. If you reached the max deduction in October, then you would be overpaying for 2 months (November and December) you would only have to wait through November, December, and January before you could file for your refund. And you could limit that by reducing your payroll withholding for November and December (or reduce estimated tax payments) which would increase your remaining paychecks and reduce your refund by a like amount.
“… but what about the extra the second employer paid?”. According to others who have posted here, the second employer doesn’t get it back (and you can’t get it back either). The IRS keeps it. I suppose you could look at it that it will help cover the deficit of someone (perhaps even you) who lives beyond the normal life expectancy and ends up receiving more in SS benefits than they paid into SS.
Each individual’s SS contributions should be filed under his/her SS number. When the max is reached, the government should know it and the second employer should be able to find out. You don’t have to trust the employee.
@Russ Davis – Re: What happens to the extra Social Security paid by your employers?
My accountant says that the employer never gets it back.
Thank you Jonathan for the reply from your accountant. I am an employer and employee of two companies. I get a paycheck from both and I will slightly cross the threshold between the two checks. I would like to not pay the employer portion on the overage knowing that I have reached the threshold as an employee, but I worry that I may be breaking the law by doing so. Knowing that the company will never get it back (as I was pretty darned sure anyway because I do my own taxes and have read each one of the tax instruction booklets), I think that I’ll take the risk.
@Jim, what risk are you going to take? Are you (1) not going to pay SS from your business or are you (2) going to pay and risk not getting it back?
I’m in a similar situation now, and I’m going to ask my accountant about this.
There’s another side to the issue of employers getting their overpayment back.
I don’t really want my main employer to know about my job on the side that will push me over the limit. Plus, there would be the thorny issue of who gets the overpayment.
Do they split it? By what percentages? Frankly, they should make the whole thing come out of the employee’s portion (which it does anyway) and adjust other rates accordingly.
The Employer pays his portion of the SS
Taxes on behalf of the employee. It should be
Credited to the employee account and the excess
Refunded just like the employee portion.
Also the employer contribution never
Benefits the employee ( the excess employer
Contribution) and hence must be credited at tax time on 1040.
We need a smart lawyer looking for fame
To fight for this in tax court!
My husband has an outside job and I own a business. I paid him from my business this year and it put him over the limit for SS contributions. So he will get back the overpayment but my company will not from what you are all saying. Knowing that next year the same thing would happen should I not pay the empolyers portion of SS.
@Deb, apparently the law is that the Employer must pay up to the limit for each Employee…regardless of the number of Employers that have paid for that Employee throughout the same calendar year.
My recommendation is that you should always pay your Employer share to stay in compliance. However, depending on the amount of work that your husband does, it may make sense to pay him less from the business in order to minimize the overall impact. That depends on your legal entity for the business and how active your husband is in his position with your company.
This is an old thread, but a very relevant one because I’m dealing with it now, for the 2014 tax year. A worked for a company much of the year and maxed out on SS, etc. Then I started my own S-Corp and am its only employee. Now I need to take salary from the S-Corp (because ironically the IRS is paranoid about S-Corp owners avoiding employment taxes by not taking salary). The company (my S-Corp) appears to be bound to withhold all FICA taxes from per the discussion above. Furthermore it needs to pay a matching amount to the IRS. However, as I am both the employer and the employee I know that I have already reached the max and that the “employer portion” is extra money that will be going to the government that I will not be able to get back. This is directly out of my pocket, is several thousand dollars, and would be a huge disadvantage to having an S-Corp if there is not a way to avoid this. Any wisdom? Thank you.
@dcpicker, my recommendation would be to take a close look at the salary (and bonuses) you pay yourself (or plan to pay yourself) for the 2014 year. If you can minimize that (while paying a “reasonable salary”) and take the rest as profit, you will minimize the social security taxes for the year. Of course, the definition of “reasonable” is what you need some basis to consider…which depends on the work you are doing. I hope that helps a little.
Thanks Jacob. That’s what I plan to do. Figure out the “reasonable” salary I can justify, taking into account the fact that I need to leave money on the business as well, and then reduce it slightly beyond that taking the difference as a distribution to try to offset the fica overpayment. It will be justifiable in an audit, but I really would rather not set any red flags to be audited in the first place.
I would have no issue defering any salary or distribution until next year, so it’s all clean, but I guess that would be a red flag for sure.
@dpicker, did you ever find a way to minimize damage ? I am in a similar situation. I think it’s acceptable not to pay employer portion of SS when you know for sure that you reached or will reach the limit from other source. that would be easily defendable in case of an audit. However, the problem is Medicare taxes, since they don’t have a limit. I can’t find a way to pay the 2.9% medicare taxes on the amount above SS limit, in a separate way without SS. Apparently Medicare and SS are linked together with most payroll systems. any other ideas ?