FICA Payroll Tips for Employers: How to Save on Taxes & Stay Compliant
How much do you know about FICA taxes, including how much to withhold from your employees’ paychecks and how much your business is responsible for paying?
If you’re like many employers, FICA might feel like just another line item in your payroll system.
Most employers and their staff are required to pay FICA taxes to the IRS. While the tax rate itself is fixed, the amount you pay can vary significantly, depending on how much your employees earn and how those earnings are reported. From hourly wages and bonuses to customer tips, nearly every dollar counts and that means so does every mistake.
Failing to understand how FICA works doesn’t just put your business at risk of noncompliance; it could mean you’re overpaying on taxes you could legally recover.
What Is FICA and How Does It Work?
FICA stands for the Federal Insurance Contributions Act. It is a mandatory payroll tax that funds two major federal programs: Social Security and Medicare. These programs provide benefits for retirees, people with disabilities and individuals receiving survivor or healthcare benefits.
.png)
Both you and your employee pay the same percentage, which means your business is responsible for matching every dollar withheld from wages. In total, FICA represents a 15.3% tax burden per employee.
This tax applies to most forms of compensation, including:
Understanding how FICA works is the first step toward managing it effectively. In the next section, we’ll look at why many businesses end up overpaying on FICA taxes and what can be done to avoid it.
Many businesses overpay FICA taxes without even realizing it. This usually happens not because they are careless but because payroll systems are set to operate on autopilot. Without regular review, incorrect classifications, underreported tips or ineligible wage types can slip through unnoticed.
In industries where tipping is common, employees may underreport tips or the system may fail to track them properly. This causes inconsistencies between reported income and actual taxable wages, which can reduce the ability for qualifying businesses to claim beneficial tax opportunities like the FICA Tip Credit.
Bonuses, fringe benefits and reimbursements must be categorized properly. Mislabeling these can result in paying FICA on income that may be exempt or partially exempt.
The Social Security portion of FICA only applies up to a certain income limit each year. If your payroll software doesn’t stop deductions after this threshold, you could be contributing more than necessary.
Even automated systems require periodic auditing. If your settings are incorrect or haven’t been updated to reflect current IRS thresholds, you may be making unnecessary contributions.
The IRS offers programs, such as the FICA Tip Credit, which allow qualifying businesses to recover overpaid taxes. Many eligible businesses never claim these credits simply because they don’t know they exist or assume their payroll provider handles it.
These errors might seem small at first, but over the course of a year, they can add up to thousands of dollars in avoidable expenses. Multiply that across a multilocation business or one with seasonal staff and the financial consequences become significant.
Reducing the amount your business pays in FICA taxes doesn’t mean avoiding your legal responsibilities. It means understanding the rules well enough to take advantage of every opportunity the IRS allows. These strategies can help you minimize payroll tax liability while remaining fully compliant.
Not all employee compensation is subject to FICA. You can reduce the total amount of taxable wages by offering certain noncash, FICA-exempt fringe benefits, such as:
These benefits not only help lower your payroll tax costs but also make your compensation packages more attractive to employees.
If you reimburse employees for business expenses like travel, mileage or meals, make sure you do so through an accountable plan. Under an accountable plan, reimbursements are not considered wages and are therefore not subject to FICA taxes.
To qualify:
This simple structural change can significantly reduce payroll tax exposure, especially for mobile or field-based employees.
For businesses in tipping industries, underreported or inconsistently tracked tips are a common problem. This not only increases your audit risk but also causes you to miss out on the FICA Tip Credit.
To improve tip tracking:
Accurate tip data leads to more accurate FICA reporting and stronger claims for payroll tax credits.
Mistakes in how compensation is categorized can quietly cost your business money. Make it a habit to review your payroll records and classifications at least quarterly.
Focus on:
Clean records make it easier to comply, avoid audits and spot savings opportunities.
The Social Security portion of FICA only applies to wages up to a certain limit each year (for example, $176,100 in 2025). However, the Medicare portion has no cap, and high earners may trigger an additional 0.9% surtax (paid by the employee only).
Make sure your payroll system is configured to:
Keeping your payroll software up to date with IRS limits prevents overpayment and ensures legal compliance.
If you've made it this far, one thing is clear: You care about running a smarter, more financially efficient business.
FICA taxes may be mandatory but overpaying them is not. Whether you're managing a single location or overseeing a multisite operation, the right payroll strategies can help you stay compliant, avoid costly mistakes and reclaim money you may have already paid.
At Anchor Accounting Services, we specialize in helping businesses like yours:
Our team handles the review, paperwork and filing with no upfront fees. If you don’t qualify or don’t save, you don’t pay.
[Start My Free Eligibility Check]
To calculate FICA tax for an employer, start by identifying each employee's FICA-eligible compensation (wages, tips, bonuses, etc.). The employer must match the employee’s FICA contribution:
Multiply each component by the employee’s taxable wages and match the total. For example, if an employee earns $1,000, the employer pays $76.50 in FICA tax ($62 for Social Security + $14.50 for Medicare).
No. Employer contributions to a Savings Incentive Match Plan for Employees individual retirement account (SIMPLE IRA) are not subject to FICA taxes. These matching contributions are considered a retirement benefit and are excluded from the employee’s taxable wages for FICA purposes. However, employee salary deferrals into a SIMPLE IRA are still subject to FICA.
Employers are required to pay 7.65% of each employee’s gross wages in FICA taxes:
This is in addition to the 7.65% withheld from the employee's paycheck, making a combined FICA tax of 15.3% per employee.
No. FICA and federal income tax are separate payroll taxes with different purposes and rules.
Both must be withheld and reported, but they serve distinct roles in the United States tax system.
You’ve already done the work, served the guests, paid the taxes and reported the tips.
Now, let our full-service FICA Tip Credit Program handle the rest. No upfront cost. No red tape. Just results.
.png)
.png)
.png)
© 2025 Anchor Accounting Services. All rights reserved