Code 3121: What Are FICA Wages and Employment?

Internal Revenue Code Section 3121 provides the framework for Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. The code establishes what the government considers “wages” and what constitutes “employment,” dictating an employer’s obligation to withhold and contribute these taxes. Correctly applying these rules is a component of payroll compliance, as misinterpreting the definitions can lead to incorrect tax filings, financial penalties, and legal complications.

Defining Wages for FICA Taxes

The tax code defines wages as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” This means that nearly any compensation an employee receives is subject to FICA taxes unless a specific exception applies. The label given to a payment is immaterial; if it is compensation for work, it is considered a wage.

This definition includes standard payments like salaries and hourly pay. It also extends to variable compensation such as bonuses, commissions, and awards. Payments for time not worked, including vacation, sick, and holiday pay, are also included in the FICA wage base.

Severance pay, provided to an employee upon termination, is also classified as wages under FICA. The Supreme Court affirmed that because these payments derive from the employer-employee relationship, they are remuneration for employment, even though payment occurs after the job has ended.

The definition also covers non-cash payments. When an employee receives goods, services, or property as compensation, the fair market value of these items must be included in their FICA wages. Cash tips of $20 or more in a calendar month are also considered wages and must be reported to the employer.

Payments Excluded from Wages

While the definition of wages is broad, the statute contains numerous exclusions that exempt certain payments from FICA taxes. These exclusions are often related to employee benefits, and for a payment to be excluded, it must meet the specific conditions laid out in the statute.

One exclusion applies to employer contributions to qualified retirement plans, such as 401(k)s, 403(b)s, and certain pension plans. These amounts are not considered FICA wages at the time of contribution. However, employee contributions made through salary reduction agreements are still included in the FICA wage base.

Employer payments for accident and health plans are also excluded from FICA wages. This includes premiums for an employee’s health, dental, or vision insurance. Employer contributions to an employee’s Health Savings Account (HSA) or Archer Medical Savings Account (MSA) under a qualifying arrangement are also not subject to FICA taxes.

The code also excludes certain fringe benefits that meet specific criteria. Other notable exclusions include:

• De minimis benefits, which are small and infrequent items where accounting is unreasonable.
• Working condition fringes, which are property or services an employee could deduct as a business expense if they had paid for it.
• Qualified transportation fringes, covering up to $325 per month for qualified parking and up to $325 per month for transit passes for 2025.
• Qualified employee discounts.
• Payments for dependent care assistance up to $5,000 per household annually, or $2,500 if married filing separately.
• Educational assistance benefits up to $5,250 per employee per year.

Defining Employment Relationships

For FICA taxes to apply, remuneration must be for services that constitute “employment.” The statute defines employment as any service performed by an employee for their employer. The IRS and courts use common-law rules, assessing the degree of control an employer has over the worker, to determine if this relationship exists.

Just as there are exclusions for certain payments, the statute also carves out specific types of services that are not considered “employment” for FICA purposes. These exceptions are based on the nature of the work or the relationship between the parties.

An exception relates to family employment. Services performed by a child under 18 for their parent, or by an individual for their spouse, are not considered employment for FICA tax purposes.

Another exception applies to students. Services performed by a student enrolled and regularly attending classes at the school, college, or university where they are employed are not subject to FICA taxes. This is because the work is considered secondary to the individual’s primary role as a student.

Services performed for a foreign government or an international organization are also excluded from the definition of employment. This means wages paid to individuals at embassies, consulates, or organizations like the United Nations are not subject to FICA withholding.

Special Rules for Specific Worker Categories

Beyond the general definitions, the tax code provides special rules that modify how FICA taxes apply to certain workers. These rules address unique employment situations and establish specific thresholds for tax liability.

Corporate officers are considered employees of the corporation they serve. Any remuneration they receive for their services as an officer is treated as wages subject to FICA taxes. This rule applies regardless of their ownership stake or other roles within the company.

Agricultural labor is subject to a different set of FICA rules. FICA taxes apply to a farmworker’s cash wages if the employer pays total cash wages of $2,500 or more to all farmworkers during the year. Alternatively, if an individual farmworker earns at least $150 in cash wages, those wages are subject to FICA regardless of the employer’s total farm payroll.

Domestic service employees, such as a nanny or housekeeper, have a specific wage threshold. For 2025, an employer has FICA tax obligations if they pay a household employee cash wages of $2,800 or more. If this threshold is met, all cash wages paid to that employee are subject to FICA taxes.