How Do I Calculate My FICA Taxes If I Am Claiming the ERTC?

December 13, 2023
Dayes Law Firm

If you’ve claimed the Employee Retention Tax Credit, or ERTC, you’ve made a smart choice. This refundable tax credit provides cash your business can use for nearly any expense, such as paying off debts, hiring new employees, or purchasing much-needed supplies.

Many employers aren’t sure how to calculate their FICA taxes if they’ve chosen to claim the ERTC. Here’s what you need to know about the ERTC and FICA taxes.

What Is the FICA Tax?

FICA, which stands for Federal Insurance Contributions Act, is a type of payroll tax you withhold from employee paychecks and send to the IRS. FICA includes two taxes: the Social Security tax and the Medicare tax.

The Social Security tax is designed to support workers once they’ve reached retirement age. The tax goes into a big pool to fund the program with the promise that money will be available to each worker when it’s their turn to collect.

As you might imagine, Medicare tax goes toward funding the Medicare program. This health insurance program pays healthcare costs for people 65 and up.

How FICA Taxes Apply to the ERTC

If you haven’t yet claimed the ERTC, know that you can only claim the credit for qualified wages, meaning those subject to FICA tax. That means if you paid certain employees under the table (and did not pay FICA tax for them on your quarterly taxes), you can’t claim those wages for the ERTC.

Also, note that you cannot claim the ERTC for independent contractors. Since you don’t pay FICA taxes for them, the IRS doesn’t consider them “eligible employees.”

Non-resident aliens temporarily present in the United States (including non-resident international students) are also subject to FICA tax exemptions, so you can’t claim the ERTC for such workers.

Calculating FICA Taxes

Understanding the ERTC and FICA taxes can be difficult for some employers. Here’s how to calculate your FICA tax rate:

  1. Determine which compensation you must apply FICA to. Per IRS rules, FICA applies to all taxable wages, taxable fringe benefits (such as moving or tuition reimbursement), and salary reductions for contributions to retirement plans.
  2. Determine whether compensation exceeds the annual Social Security wage base ($160,200 for 2023). If it’s below the base, you’ll use the 7.65% FICA rate. If it’s above the base, you must use the Social Security tax rate for wages up to the base and apply the Medicare tax rate to all compensation.
  3. Take the tax for employee compensation and apply an equal amount for your employer obligation.

Overpaying FICA taxes is quite common. If you think you made a mistake in your calculations, you can request a refund from the IRS by completing  Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. You must submit a separate form for each period you want to claim a refund.

Note that the IRS can’t refund the employee portion of FICA taxes unless one of the following requirements is met:

  • You have reimbursed or repaid your employee
  • You have secured your employee’s consent to the allowance of the refund claim

If you’d like to collect a refund for overpayments made in previous years, you must also certify that the employee has not made any prior claims and will not make any future claims for a refund.

Dayes Law Firm Will Help You Calculate Your FICA Taxes

Feeling a bit lost when it comes to the ERTC and FICA taxes? Let Dayes Law Firm help. We can tell you whether you’re eligible for the ERTC and provide guidance on calculating FICA taxes.

For a free consultation, call (800) 503-2000.