Tax tips: How to get excess FICA payments refunded by the IRS
During an episode of the popular sitcom Friends, Rachel Green, one of the lead characters, looked at her first paycheck and exclaimed “Who is this FICA guy and why is he getting all my money?” This of course is not the first person to have ever felt a slight sense of annoyance while reviewing a pay stub and seeing a small but significant portion of their pay going towards Social Security funding. Employers generally withheld FICA tax at the rate of 6.2 percent of an employee’s total pay. The amount is matched by the employer and is credited to the employee’s account in the Social Security Administration.
How is FICA tax calculated?
Recent changes made to the tax rules have reduced the employee’s contribution percentage to 4.2 percent while retaining the employer’s matching contribution at 6.2 percent. The yearly contribution limits keep changing and as such most taxpayers unknowingly overpay on this account. The fact is that this excess payment can be recovered from FICA as tax credit when you file at the end of the fiscal year.
How is it automatically overpaid?
Last year, FICA tax was collected at a rate of 4.2 percent up to a maximum of $4485.60 given that a taxpayer earned a minimum of $106,800. The Social Security Administration adjust the minimum wage base every year factoring in the inflation rate. In 2012, the SSA set the wage base to $110,000 and retained the tax percent at 4.2 percent. In most cases it so happens that once your pay goes over the limit, employer’s stop withholding on account of FICA.
In case the individual changes the job, the combined income from both employers go over the limit and there is a overpayment towards Social Security since the second employer is not aware of how much the first employer has paid into the SS fund..
How to recover the overpayment?
The easiest way to recover this excess payment is through your annual tax filing process. The trick is to fill out and file Form 1040. Adding up the amounts reported by each employer on the W-2s pertaining to SS withholding and then subtracting the maximum SS contribution, that is, $4485.60 will yield the amount of FICA tax overpayment. The amount can then be listed for tax credit on line 69 of the 1040 form. Married couples who file jointly have to calculate their overpayments separately before including them in the returns file.
How is the overpayment disbursed or refunded?
There is no guarantee for refund though and it is not always that people receive checks from the IRS on this account on a regular basis. There are a number of things the IRS considers before calculating the FICA refund amount and these include excess retirement tax, estimated taxes filed and paid previously, withheld income tax, etc.
The IRS usually applies all excess and overpayments to cover different underpayments before even considering sending out a refund. The best idea would be to review and carefully study IRS Publication 505 along with Tax Withholding and Estimated Tax as this has a detailed breakdown of how excess SS contributions are used and distributed by the IRS to cover your other backlogs, if any.