Understanding FICA

When expanding your business to the United States, few tax obligations are as fundamental—or as heavily enforced—as the Federal Insurance Contributions Act (FICA). This payroll tax system, established in 1935, forms the backbone of America’s social safety net, funding Social Security and Medicare benefits for millions of Americans. For international employers, FICA compliance isn’t optional—it’s a legal requirement that comes with severe financial consequences when mismanaged.

The enforcement statistics tell a compelling story. In fiscal year 2024, the IRS collected $120.2 billion in unpaid employment tax assessments and imposed the Trust Fund Recovery Penalty (TFRP) on businesses that willfully failed to deposit these taxes. This penalty doesn’t just hit companies—it can make business owners and responsible parties personally liable for 100% of unpaid taxes, plus interest.

“FICA taxes represent money held in trust for the federal government,” explains Geanice Barganier, Vice President of People & Operations at Foothold America. “International companies often underestimate the personal liability risks and the IRS’s aggressive collection powers when these taxes aren’t properly managed.”

This comprehensive guide will equip international employers with the knowledge needed to navigate FICA requirements confidently, understand the compliance risks, and implement systems to avoid costly violations in the competitive US market.

What is FICA? Understanding America’s Payroll Tax Foundation

The Federal Insurance Contributions Act (FICA) is a federal payroll tax that funds two essential social insurance programs: Social Security (OASDI – Old-Age, Survivors, and Disability Insurance) providing retirement, disability, and survivor benefits, and Medicare providing hospital insurance for individuals aged 65 and older, plus those with qualifying disabilities.

FICA operates on a shared contribution model where both employers and employees pay equal portions, creating a combined funding mechanism that has supported American workers since 1935. The Medicare component was added in 1965, expanding the social safety net to include healthcare coverage.

Unlike income taxes, FICA taxes are flat percentage rates applied to wages with no progressive brackets, paid by both employer and employee in equal amounts, and subject to specific wage base limits for Social Security. Critically, these taxes are held in trust for the government from the moment of withholding, making misuse a serious federal offense that can result in personal liability for business owners.

Understanding this trust fund structure is essential because FICA taxes are considered government property immediately upon withholding from employee paychecks. This isn’t company money that can be used for other business expenses—it’s federal tax revenue that must be deposited according to strict IRS schedules outlined in Publication 15 (Circular E), Employer’s Tax Guide.

2025 FICA Tax Rates and Wage Base Limits

Understanding current rates and limits is essential for accurate payroll compliance. The Social Security Administration and IRS set these annually based on wage growth and inflation:

The Social Security wage base increased from $168,600 in 2024 to $176,100 in 2025—a 4.45% increase that raises the maximum individual contribution significantly. For employees earning over $200,000 annually, an Additional Medicare Tax of 0.9% applies, but employers must withhold this tax without providing a matching contribution.

How FICA Taxes Are Calculated: Detailed Examples with Explanations

Understanding FICA calculations requires examining how different salary levels interact with wage base limits and additional taxes. Let’s walk through comprehensive examples that international employers commonly encounter:

Example 1: Mid-Level Employee ($75,000 annual salary)

For employees earning below the Social Security wage base, FICA calculations are straightforward because both Social Security and Medicare taxes apply to the full salary amount.

Why this calculation matters: Most US employees fall into this category, making it the most common scenario for international employers to understand.

Step-by-step calculation:

Employee Payroll Deductions (what comes out of their paycheck):

• Social Security: $75,000 × 6.2% = $4,650
  • Reasoning: Full salary is below $176,100 wage base, so entire amount is subject to Social Security tax
• Medicare: $75,000 × 1.45% = $1,087.50
  • Reasoning: All wages subject to Medicare tax with no wage base limit
• Additional Medicare Tax: $0
  • Reasoning: Salary below $200,000 threshold, so no additional tax applies
• Total Employee FICA Deduction: $5,737.50

Employer Contributions (what the company pays):

• Social Security: $75,000 × 6.2% = $4,650 (matches employee exactly)
• Medicare: $75,000 × 1.45% = $1,087.50 (matches employee exactly)
• Additional Medicare Tax: $0 (employers never match this tax)
• Total Employer FICA Cost: $5,737.50

Combined FICA Tax Burden: $11,475 (employee + employer contributions)

This example demonstrates the core principle of FICA: equal sharing between employer and employee, with the total cost to employ someone being their gross salary plus the employer’s FICA contribution.

Example 2: High-Earning Executive ($250,000 annual salary)

High earners present more complex FICA calculations due to the Social Security wage base limit and Additional Medicare Tax threshold. This scenario is common for international companies bringing senior executives to the US.

Why this matters: International companies often relocate high-earning executives to the US, making this calculation critical for accurate budgeting and compliance.

Step-by-step calculation:

Employee Payroll Deductions:

• Social Security: $176,100 × 6.2% = $10,918.20
  • Reasoning: Social Security tax only applies to first $176,100 of wages, not the full $250,000
  • Key insight: Once an employee reaches the wage base, no additional Social Security tax is deducted for the remainder of the year
• Medicare: $250,000 × 1.45% = $3,625
  • Reasoning: Medicare tax applies to all wages with no limit
• Additional Medicare Tax: ($250,000 – $200,000) × 0.9% = $450
  • Reasoning: Additional tax only applies to wages exceeding $200,000 threshold
  • Critical point: Employer must begin withholding this tax once employee reaches $200,000 in year-to-date wages
• Total Employee FICA Deduction: $14,993.20

Employer Contributions:

• Social Security: $10,918.20 (matches employee contribution up to wage base)
• Medicare: $3,625 (matches employee contribution on all wages)
• Additional Medicare Tax: $0 (no employer match required by law)
• Total Employer FICA Cost: $14,543.20

Combined FICA Tax Burden: $29,536.40

This example illustrates how FICA taxes become regressive for high earners due to the Social Security wage base cap, while Medicare taxes continue to apply to all income levels.

Example 3: Self-Employed Individual – SECA Taxes ($100,000 annual income)

Self-employed individuals and business owners don’t pay FICA taxes directly. Instead, they pay Self-Employment Contributions Act (SECA) taxes, which serve the same function but require different calculations and forms.

Why this matters: International business owners establishing US operations often start as self-employed individuals before incorporating, making SECA tax understanding essential.

The key difference: Self-employed individuals pay both the employee and employer portions of Social Security and Medicare taxes because they are effectively both the worker and the employer.

Step-by-step calculation:

First, calculate net earnings from self-employment:

• Gross self-employment income: $100,000
• Less: Deduction for employer-equivalent portion of SE tax: $100,000 × 92.35% = $92,350
  • Reasoning: This deduction approximates the employer’s business expense deduction for FICA taxes

Self-Employment Tax Calculation:

• Social Security: $92,350 × 12.4% = $11,451.40
  • Reasoning: Pay both employee (6.2%) and employer (6.2%) portions
• Medicare: $92,350 × 2.9% = $2,678.15
  • Reasoning: Pay both employee (1.45%) and employer (1.45%) portions
• Total Self-Employment Tax: $14,129.55

Tax Benefit: Self-employed individuals can deduct 50% of their self-employment tax ($7,064.78) when calculating their adjusted gross income, partially offsetting the burden of paying both portions.

Form Requirements: Self-employed individuals report these taxes on Schedule SE (Form 1040) rather than through payroll withholding.

Trust Fund Recovery Penalty: The Personal Liability Risk

The Trust Fund Recovery Penalty (TFRP) represents one of the harshest penalties in the federal tax code, specifically designed to ensure employment tax compliance. For international employers, understanding this penalty is crucial for personal asset protection.

The IRS defines the TFRP as a penalty equal to 100% of unpaid trust fund taxes that can be imposed on any responsible person who willfully fails to collect, account for, or pay over these taxes. The penalty is severe because employment taxes are considered “trust fund” taxes—money that belongs to the government from the moment it’s withheld from employee paychecks.

What Triggers TFRP Assessment?

The IRS imposes TFRP when they determine a business has “willfully” failed to pay employment taxes. Importantly, “willful” doesn’t require intent to defraud—it simply means the business had knowledge of unpaid taxes and chose to pay other expenses instead. Common triggers include paying vendors, rent, or other business expenses while employment taxes remain unpaid.

TFRP can be imposed on any “responsible person,” including corporate officers and directors, partners in partnerships, sole proprietors, employees with payroll authority, anyone with signature authority over business accounts, and in some cases, third-party payroll service providers.

TFRP Calculation and Personal Impact

“We’ve seen international companies face devastating TFRP assessments because they didn’t understand the personal liability risks,” notes Robert R. Esquijarosa, Head of Service Implementation at Foothold America. “One client faced a $180,000 personal assessment when their payroll company failed to remit taxes—even though they thought everything was properly handled.”

The critical distinction is that TFRP only applies to the “trust fund” portion of employment taxes—the amounts withheld from employee paychecks. The employer’s matching contributions are collected separately and don’t create personal liability under TFRP.

International Employer Compliance Considerations

International companies expanding to the US face unique FICA compliance challenges that require specialized knowledge and careful planning.

Social Security Totalization Agreements: Limited Relevance for US Expansion

The United States has Social Security totalization agreements with 30 countries designed to eliminate dual social security taxation and coordinate benefit eligibility. However, these agreements have limited practical application for most international companies expanding to the US.

How Totalization Agreements Work: These agreements typically apply to employees who are temporarily assigned to work in the US (usually less than 5 years) and continue to pay social security taxes in their home country. The employee receives a Certificate of Coverage from their home country’s social security system, which exempts them from US Social Security and Medicare taxes.

Why This Has Limited Relevance for US Expansion: Most international companies expanding to the US are hiring permanent US employees or relocating executives for long-term assignments exceeding the temporary limits in totalization agreements. Additionally, the administrative burden of obtaining certificates and maintaining compliance often outweighs the tax savings for permanent expansion strategies.

“While totalization agreements exist, most of our international clients expanding to the US find they don’t apply to their hiring strategies,” explains Angelique Soulet-Bangurah, PHR, Head of EOR Services & Talent Acquisition Lead at Foothold America. “These agreements are designed for temporary assignments, not permanent market expansion.”

Student and Scholar Exemptions

Certain foreign nationals may be exempt from FICA taxes under specific circumstances. F-1 visa students are generally exempt from FICA taxes for their first 5 calendar years in the US if they maintain their student status. J-1 exchange visitors may also be exempt for their initial period of stay, typically 2 years for teachers and trainees.

However, these exemptions require careful documentation and status monitoring. IRS Publication 519 provides detailed guidance on tax obligations for foreign nationals, including specific requirements for claiming FICA exemptions.

Multi-State Employment Complications

International employers with employees in multiple states must navigate varying State Unemployment Insurance (SUI) requirements alongside FICA obligations. Each state sets its own unemployment tax rates and wage bases, creating complex compliance requirements for distributed workforces.

For example, Washington state has a $71,300 wage base for unemployment taxes—significantly higher than most states—while also requiring paid family and medical leave contributions. California requires State Disability Insurance contributions in addition to standard unemployment taxes.

This complexity is why many international companies find that comprehensive employment services provide significant value in managing multi-jurisdictional compliance requirements.

Common FICA Compliance Failures and Enforcement

Understanding the most frequent FICA compliance failures helps international employers focus their attention on the highest-risk areas.

The IRS Employment Tax Examination Program actively targets businesses with employment tax compliance issues. In fiscal year 2024, the IRS conducted over 500,000 employment tax examinations, with FICA-related issues representing a significant portion of discovered violations.

Misclassification of Workers remains the most costly compliance failure for international employers. Treating employees as independent contractors eliminates FICA withholding and employer contribution obligations, but when the IRS reclassifies workers during an audit, employers face back taxes, penalties, and interest on potentially years of unpaid employment taxes. Understanding proper worker classification is essential for avoiding these substantial liabilities.

Late or Missing Deposits trigger immediate penalties under the Federal Tax Deposit System. The penalty structure escalates rapidly: 2% for deposits 1-5 days late, 5% for deposits 6-15 days late, 10% for deposits 16+ days late, and 15% for deposits not made within 10 days after the IRS issues a demand notice.

Inadequate Recordkeeping creates problems during IRS examinations because employers cannot verify their compliance with FICA requirements. The IRS requires employers to maintain payroll records for at least four years, including employee wage information, tax withholding records, and deposit documentation.

Third-Party Payroll Service Failures represent a growing area of TFRP enforcement. Many international employers assume that outsourcing payroll transfers liability, but the IRS maintains that employers remain ultimately responsible for their employment tax obligations. IRS Notice 784 specifically addresses TFRP liability for employers using payroll service providers.

“International companies must understand that outsourcing payroll doesn’t transfer legal responsibility,” warns Tiffany Hill, Client Service Administrator at Foothold America. “We’ve seen businesses face TFRP assessments even when they thought their payroll company was handling everything correctly.”

State Unemployment Insurance Integration

While FICA is federal, international employers must also understand how Federal Unemployment Tax (FUTA) and state unemployment insurance interact with FICA obligations.

FUTA requires employers to pay 6.0% on the first $7,000 of each employee’s annual wages, but employers can claim a credit of up to 5.4% for timely payment of state unemployment taxes, resulting in an effective federal rate of 0.6%. This creates a direct connection between federal and state compliance requirements.

State unemployment tax rates vary significantly based on employer experience ratings, industry classifications, and state-specific factors. New employers typically start with standard rates that adjust based on their unemployment claims experience over time. For international companies, understanding these variations is crucial for accurate budget planning and payroll setup.

Some states also require additional payroll taxes beyond standard unemployment insurance. For example, California requires State Disability Insurance contributions from both employers and employees, while Washington state requires paid family and medical leave contributions.

These state-level requirements integrate with federal FICA obligations through the quarterly reporting process on Form 941, where employers report all federal employment taxes, and annual reporting on Form 940 for unemployment taxes.

Conclusion: Protecting Your Business and Personal Assets

FICA compliance forms the bedrock of sustainable US operations for international companies—get it wrong, and the consequences extend far beyond your business to your personal financial security. The stark reality is that the IRS collected over $120.2 billion in unpaid employment taxes in 2024, with enforcement actions that can literally seize personal assets through the Trust Fund Recovery Penalty.

Understanding FICA isn’t just about tax compliance—it’s about building credible, lasting US operations that protect both your business interests and personal wealth. The 7.65% employer contribution represents a significant cost that must be factored into your US expansion budget, while the personal liability risks demand immediate attention to compliance systems and processes.

The Personal Stakes Are Real

The Trust Fund Recovery Penalty doesn’t distinguish between intentional fraud and simple negligence. Business owners across America face personal liability for 100% of unpaid employment taxes, plus interest, when the IRS determines they had control over payroll decisions. As detailed in IRS Notice 784, even using third-party payroll services doesn’t eliminate this personal exposure.

For international executives relocating to establish US operations, this personal liability can threaten homes, savings, and retirement accounts. The IRS Trust Fund Recovery Penalty guidelines make clear that responsible persons face the full weight of federal collection powers, including asset seizure and garnishment.

Beyond Basic Compliance: Strategic Considerations

Successful FICA management involves more than calculating percentages—it requires integrating federal requirements with state unemployment insurance obligations, proper worker classification decisions, and multi-jurisdictional payroll complexity that increases exponentially with distributed workforces.

International companies must also navigate the intersection of FICA with other US employment obligations covered in our comprehensive labor law guide, including workers’ compensation, unemployment insurance, and state-specific requirements that vary dramatically across America’s 50 states.

“FICA compliance isn’t just about following tax law—it’s about protecting your personal assets and business reputation while building sustainable US operations,” concludes Joanne M. Farquharson, President and CEO of Foothold America. “Companies that invest in proper FICA management from day one position themselves for long-term success in the American market while protecting their executives from devastating personal liability.”

Your Path Forward

The complexity of FICA compliance, combined with severe enforcement penalties and personal liability risks, makes this unsuitable for trial-and-error approaches. The IRS Small Business and Self-Employed Division actively pursues employment tax violations, with sophisticated detection systems that identify non-compliance patterns across industries and geographies.

International companies have two primary paths: develop substantial internal expertise in US payroll tax compliance or partner with experienced professionals who understand both technical requirements and enforcement realities. Given the personal liability stakes and the escalating penalty structure for violations, most international companies find professional guidance essential for protecting both business operations and personal assets.

Consider that FICA compliance integrates with virtually every aspect of US employment, from hiring your first employee to managing ongoing payroll tax obligations. The interconnected nature of US employment compliance makes FICA management a gateway to broader operational success in America’s complex regulatory environment.

Protect Your Business and Personal Assets Today: Don’t let FICA compliance derail your US expansion or expose you to devastating personal liability. Contact Foothold America’s experienced team to understand how our comprehensive employment services eliminate personal FICA liability while ensuring compliance. Schedule a consultation with one of our expansion advisors to discuss your specific situation.

This guide provides general information about FICA requirements and should not be considered legal or tax advice. Employment tax laws are complex, change frequently, and carry severe personal liability consequences. For specific compliance guidance that protects your business and personal assets, consult with qualified professionals or contact Foothold America’s expert team at (617) 702-3402.