A startup pays a developer $120,000, calls her a "1099 contractor," and skips payroll taxes. The IRS reclassifies her as an employee. Back FICA, FUTA, withholding, penalties, and interest follow. Worker classification is not a labeling exercise.
FICA funds Social Security (OASDI) and Medicare.
- Social Security: 6.2% on the employee + 6.2% on the employer, on wages up to the annual wage base ($184,500 for 2025; indexed).
- Medicare: 1.45% on each side, no wage cap.
- Additional Medicare: 0.9% on employee wages above $200,000; employer withholds but does not match.
KEY: Social Security has a wage cap. Medicare does not. Only the employee pays the additional 0.9% Medicare surtax.
FUTA funds federal-state unemployment insurance and is employer-only, never withheld from employees.
The statutory rate is 6.0% on the first $7,000 of each employee's annual wages. Employers paying state unemployment tax on time get up to a 5.4% credit, dropping the effective rate to 0.6% (max $42 per full-year employee). States in credit reduction status get a smaller credit and a higher effective FUTA rate.
Common mistakes
- Forgetting that FUTA is employer-only. FUTA never appears on the employee's pay stub. Trap: a payroll computation that "splits FUTA equally" is wrong, FUTA is 100% employer-paid.
- Applying the Social Security cap to Medicare. The 6.2% SS tax stops at the wage base. The 1.45% Medicare tax does not. Capping Medicare at the SS base under-computes the employer match on high-wage employees.
- Confusing §4980H(a) and §4980H(b). The (a) "sledgehammer" applies when no offer is made (or fewer than 95% offered), computed on all FT employees minus 30. The (b) penalty applies when coverage is offered but inadequate, computed only on credit-receiving employees.
Bottom line
- FICA splits equally: 6.2% Social Security up to the wage base, 1.45% Medicare uncapped, plus 0.9% additional Medicare on wages above $200,000 (employee only).
- FUTA is 6.0% on the first $7,000, employer-only, with a 5.4% credit down to an effective 0.6% in most states.
- Form 941 quarterly, 940 annual FUTA, 944 small-employer annual when IRS designates, W-2 and W-3 to SSA by January 31.
- Worker classification turns on the common-law test (behavioral, financial, relational control), not on whether a 1099 issued; misclassification triggers back FICA, FUTA, withholding, penalties, interest.
Exam shortcut
For payroll computations: 6.2% Social Security stops at the wage base, 1.45% Medicare has no cap, plus 0.9% additional Medicare on the employee above $200,000. For misclassification: the trap is "look at the 1099": the answer is always the common-law test plus Section 530. For ACA: "no offer" = (a) sledgehammer on all FT employees minus 30; "inadequate offer" = (b) per credit-receiving employee.
The full lesson (about 3,098 words, 21 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.D1
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