What Is Uncollected Social Security Tax?

What Is Uncollected Social Security Tax?

Social Security tax is a payroll tax that funds retirement, disability, and survivor benefits through the U.S. Social Security program. Employers and employees both contribute to this program, with the employee’s portion typically withheld directly from their wages. The current Social Security tax rate is 6.2% for employees, matched by an additional 6.2% from employers, totaling 12.4% on gross wages up to a set annual limit. This tax, along with Medicare tax, falls under the Federal Insurance Contributions Act (FICA).

Uncollected Social Security tax refers to the portion of this tax that was due but not withheld or paid at the time it should have been. While employers are generally responsible for withholding and remitting these taxes, there are specific situations where the employer either cannot or does not collect the employee’s share. In such instances, the responsibility for ensuring these taxes are paid falls to the individual taxpayer.

Situations Leading to Uncollected Social Security Tax

Several scenarios can result in Social Security tax not being collected by an employer, thereby making the employee responsible for payment. These situations often involve unique income types or employment classifications that deviate from standard wage withholding.

One common instance is unreported tip income. Employees who receive tips directly from customers are responsible for reporting these amounts to their employer. If an employee fails to report all tips, or if the employer cannot collect the Social Security tax on reported tips from the employee’s regular wages, that tax becomes uncollected. The employer is obligated to report the uncollected amount on the employee’s Form W-2.

Another situation involves the cost of employer-provided group-term life insurance coverage exceeding $50,000. The value of this excess coverage is considered taxable income for Social Security purposes. Employers sometimes do not withhold the Social Security tax on this imputed income, particularly for former employees, leading to uncollected tax.

Certain non-cash fringe benefits may also be subject to Social Security tax, even if employers do not always withhold on them. For example, the value of certain personal use of a company car or other benefits can be taxable. If the employer does not properly account for and withhold Social Security tax on these benefits, the uncollected portion becomes the employee’s responsibility.

Payments made to former employees, such as certain deferred compensation or severance, can also lead to uncollected Social Security tax. If these payments are made after the individual’s employment has ended, the employer may no longer be set up to withhold FICA taxes, or the nature of the payment might not trigger automatic withholding, leaving the tax uncollected.

Misclassification of workers, where an individual is treated as an independent contractor but should have been an employee, results in the employer not withholding Social Security tax, making the worker responsible for their share.

Identifying and Reporting Uncollected Social Security Tax

Taxpayers can identify uncollected Social Security tax by reviewing their annual wage and tax statements, such as Form W-2, or by understanding their income sources. Uncollected Social Security tax on tips or group-term life insurance may appear in Box 12 of Form W-2. This is indicated by specific codes like ‘A’ for uncollected Social Security on tips or ‘M’ for uncollected Social Security on group-term life insurance for former employees.

Form 4137: Unreported Tip Income

For employees who received tips they did not report to their employer, or for allocated tips, Form 4137, Social Security and Medicare Tax on Unreported Tip Income, is used. This form helps calculate the Social Security and Medicare tax owed on those tips. To complete Form 4137, taxpayers need to provide details such as total tips received and tips reported to their employer. The form guides the calculation of the uncollected tax, which is then added to the taxpayer’s total tax liability on Form 1040.

Form 8919: Worker Misclassification

If an individual performed services as an employee but was treated as an independent contractor by their employer, and Social Security and Medicare taxes were not withheld, Form 8919, Uncollected Social Security and Medicare Tax on Wages, is required. This form allows individuals to report their share of the uncollected Social Security tax. Information needed for Form 8919 includes the firm’s name and federal identification number, along with the total wages received for which no Social Security or Medicare tax was withheld.

Using Form 8919 ensures that the Social Security earnings are properly credited to the individual’s Social Security record. Both Form 4137 and Form 8919 are available on the IRS website, and the calculated uncollected tax is reported on the individual’s Form 1040.

Paying Uncollected Social Security Tax

Once uncollected Social Security tax is identified and reported on forms like 4137 or 8919, it integrates into the taxpayer’s overall tax liability. This additional tax is added to the total amount due on Form 1040.

Payment of this uncollected tax can occur in several ways. If a refund is due, the uncollected Social Security tax reduces it. If additional tax is owed after other withholdings and credits, the uncollected tax increases the balance due, requiring an additional payment when the tax return is filed.

For substantial uncollected Social Security tax, taxpayers should consider making estimated tax payments throughout the year. The IRS provides Form 1040-ES, Estimated Tax for Individuals, for this purpose. Making quarterly estimated tax payments helps avoid potential underpayment penalties, assessed if significant tax is owed but not paid throughout the year.

Estimated tax payments are generally due on April 15, June 15, September 15, and January 15 of the following year. Failure to pay the uncollected tax by the annual tax deadline or through adequate estimated payments can result in IRS penalties and interest. Proactive planning and timely payment are important to manage these tax obligations.