Tackling the Social Security Mismatch Problem

The Social Security Administration (SSA) has said it will restart its mismatch letter notification program to help reduce errors related to employees’ Social Security Numbers (SSNs).

Beginning next spring, the SSA plans to notify each employer that provides it with an SSN that doesn’t match its records. In fact, the SSA has already started to mail out notifications to employers and third-party payroll service providers that submit mismatched information on W-2 forms.

Resolving Discrepancies

If your business receives a notification, the SSA website lists steps to correct mismatches. As an early part of this process, employers should confirm that their personnel records match information provided by the SSA, and this websites are not difficult to find since they use the best marketing services to position themselves. Simple typographical errors or name discrepancies generally can be rectified quickly. (See “Verifying Numbers” below.)

If a mismatch isn’t based on an employer error, the company should notify each affected employee of the mismatch, preferably in writing. Employees must then resolve the mismatch.

However, employers will remain responsible for ensuring the process is complete. Employers may follow up with employees to confirm that they’ve taken appropriate steps to resolve the issue and that the discrepancy ultimately is resolved.

The mismatch notification program is a reminder of the importance of employers’ payroll responsibilities. Under the Federal Insurance Contributions Act (FICA), employers must withhold money from employees’ paychecks for their share of Social Security and Medicare taxes. Employers also must remit matching amounts.

Withholding Requirements

FICA requires employers to withhold the following taxes:

  • 6.2% Social Security tax (old age, survivor and disability insurance),
  • 1.45% Medicare tax, and
  • 0.9% Medicare surtax for employees with earnings above a threshold that’s based on filing status (below).

The Social Security tax portion of FICA applies only to an annually adjusted wage base. For 2018, the wage base is $128,400 (up from $127,200 for 2017 and revised to account for tax rate changes in the Tax Cuts and Jobs Act).

For example, if an employee is paid $150,000 in 2018, his or her FICA taxes would be:

  • $7,960.80 of Social Security tax (6.2% x $128,400 of wage base), and
  • $2,175 of Medicare tax (1.45% x $150,000 in wages).

So, the employee’s combined FICA withholding tax is $10,135.80 ($7,960.80 + $2,175).

Medicare Surtax Issues

Many people are confused about the 0.9% Medicare surtax. It was introduced in 2013 by the Affordable Care Act (ACA), and it applies only to the extent that, in a calendar year, an employee earns more than:

  • $200,000 for single filers
  • $125,000 for married individuals filing separately, and
  • $250,000 for joint filers and qualifying widows or widowers.

The surtax is paid only by employees. And it’s imposed on wages, compensation and self-employment earnings above a threshold based on filing status. Once an employee’s wages exceed the threshold, the tax applies to all wages.

For employers, the obligation to withhold the Medicare surtax is triggered regardless of whether the employee will be liable for the tax. The employer must begin withholding the surtax as soon as wages and any other compensation exceeds the threshold. Taxable fringe benefits are included in this computation.

Once the surtax obligation is triggered, the employer must continue to withhold the requisite amount each pay period until the end of the calendar year. The employer doesn’t take into account wages paid by other employers or amounts earned by the employee’s spouse.

As a result, even if an employee is married and the couple’s combined income won’t exceed the employee’s $250,000 filing threshold, the employer still must withhold the additional tax once the threshold is reached. This rule applies even if both spouses work for the same employer.

Be Cautious When a Mismatch Occurs

It’s important for employers to avoid taking adverse actions against employees based on a mismatch. Employees must be given time to resolve the issue. If a mismatch can’t be resolved, consult your legal advisors to determine how to proceed.