Payroll/FICA Tax

Taxation is complex. We provide below what we believe are the key highlights for this tax type in a 2-3 minute read for reference purposes. It is not tax advice and does not discuss the vast majority of the finer points.

What Are Payroll/FICA Taxes? When/How Do They Apply?

The Federal Insurance Contributions Act (FICA) requires employers to withhold three types of employment taxes from employee paychecks: (1) Social Security; (2) Medicare, and (3) an additional Medicare Tax/Surcharge for high wager earners.

Social Security Tax

Social Security tax is 50:50 paid by employees and employers up to an annual maximum. In 2023, employees and employers each pay/withhold 6.2% of earned wages (12.4% in total), up to a maximum of $160,200 (e.g. a max tax bill of $9,932 for each of the employee and the employer). The annual maximum is adjusted upwards each year to account for inflation. Once wages exceed the annual maximum, no additional taxes are due/paid and Social Security withholding stops.

Medicare Tax (Including the Additional Medicare Surcharge Tax)

The base Medicare tax is also 50:50 paid by employees and employers, but with no annual max. In 2023, employees and employers each pay/withhold 1.45% of earned wages (2.9% in total). Additionally, high wage earners may also be subject to a higher tax threshold. In 2023, single-tax filers will owe an additional 0.9% on wages exceeding $200,000; married filing jointly tax payers will owe an additional 0.9% on wages exceeding $250,000. Unlike the base Medicare tax rate, the additional Medicare surcharge tax is paid only by the employee (no incremental employer tax).

Withholding Requirements

Payroll/FICA taxes are required to be withheld from wages by employers. Employers then match the amounts paid, contributing to Social Security and Medicare, for a total FICA tax -- and remit the funds to the IRS monthly (failure to properly withhold, report, and pay FICA taxes can result in penalties, interest charges, and potential liability).

What Types of Stock Compensation Does This Apply To?

Stock Comp Type	Payroll/FICA Taxes Applicability
ISOs	None. Regardless of disposition type (qualifying or disqualifying), ISOs do not trigger FICA taxes. For more info see: ISO Stock Options
NSOs	Likely. If there is bargain element when NSOs are exercised, income is generated and FICA taxes are owed on that income. But if there is no bargain element, no income is generated and thus no FICA taxes. For more info see: NSO Stock Options
RSUs	Yes. RSUs are taxed at vesting as ordinary income and FICA taxes apply. For more info see: Restricted Stock Units (RSU)
ESPPs	Partial. Depends on (i) what ESPP plan type it is (Qualified/Non-Qualified plan), and (ii) if a Qualified plan, when the shares were sold. Generally, the discount percent is taxed as ordinary income, and in some cases, the lookback benefit would be as well. For more info see: Employee Stock Purchase Plan (ESPP)
RSAs	Unlikely. Nearly all RSA grantees file an 83(b) election, which obviates any future income from the grant (and thus no FICA taxes). But in the rare case an 83(b) election was not filed, RSAs would generate ordinary income when they vest (and FICA taxes would be owed). For more info see: Restricted Stock Award (RSA)
SARs	Yes. SARs generate ordinary income based on the spread between the exercise price and the current FMV, and as such FICA would apply. For more info see: Stock Appreciation Right (SAR)
Phantom Stock	Yes. Phantom Stock generates ordinary income upon payout, and as such FICA would apply. For more info see: Phantom Stock

Unique Items and Special Situations

Self-Employed Individuals Are Responsible for Both Portions of FICA Taxes

If you are self-employed, you are both (i) employee and (ii) employer, and thus will owe both parts of the FICA taxes (frequently referred to as "self-employment tax"). 12.4% Social Security tax (up to the annual limit) + 2.9% Medicare tax + 0.9% Medicare surcharge tax (if applicable) would all be owed and paid by the self-employed individual. As a small silver lining, self-employed individuals may deduct half of the self-employment tax amount on their personal tax returns.

In Rare Circumstances, an Individual May Owe a Different FICA Tax Rate (Or Be Exempt)

For example, some government workers pay reduced Social Security tax rates or are not subject to Social Security taxes at all. Their wages are still subject to the standard Medicare tax rates.