The Federated States of Micronesia (FSM) operates a tax system that includes income tax and social security contributions, impacting both employers and employees. Understanding these obligations is crucial for businesses operating within the FSM's four states: Yap, Chuuk, Pohnpei, and Kosrae. Employers play a key role in the tax collection process through payroll withholding and contributions.
Compliance with FSM tax regulations ensures smooth business operations and proper fulfillment of legal responsibilities towards employees and the government. This guide outlines the key tax obligations and deductions relevant to employment in the FSM for the 2025 tax year.
Employer Social Security and Payroll Tax Obligations
Employers in the Federated States of Micronesia are required to contribute to the FSM Social Security Administration (SSAFSM) on behalf of their employees. This is a mandatory contribution system providing retirement, disability, and survivor benefits.
The Social Security contribution rate is split between the employer and the employee. For 2025, the standard contribution rates are:
- Employer Contribution: 7.5% of gross wages
- Employee Contribution: 7.5% of gross wages
These contributions are calculated on the employee's gross wages up to an annual wage base limit. For 2025, the annual wage base limit is $10,000. This means that contributions are only calculated on the first $10,000 of an employee's annual earnings. Any earnings above this threshold are not subject to Social Security contributions.
Employers are responsible for withholding the employee's portion from their wages and remitting both the employer and employee contributions to the SSA FSM on a regular basis, typically monthly. There are no other significant employer-specific payroll taxes at the federal or state level in the FSM beyond Social Security.
Income Tax Withholding Requirements
Employers are also responsible for withholding income tax from their employees' wages and remitting it to the FSM Division of Tax and Revenue. The FSM has a progressive income tax system for individuals.
The income tax rates for individuals in the FSM are structured as follows:
| Annual Taxable Income | Tax Rate |
|---|---|
| Up to $5,000 | 6% |
| Over $5,000 | 10% |
Employers must calculate the appropriate amount of tax to withhold based on the employee's gross wages, filing status, and claimed deductions/allowances. While the FSM tax law provides for deductions and allowances, employers typically use withholding tables or formulas provided by the Division of Tax and Revenue to determine the amount to withhold from each payroll period. The goal is to approximate the employee's annual tax liability through regular withholdings.
Employee Tax Deductions and Allowances
Employees in the FSM are entitled to certain deductions and allowances that reduce their taxable income. These are typically claimed when filing their annual income tax return, but they influence the overall tax burden and the accuracy of employer withholding.
Key deductions and allowances include:
- Standard Deduction: A fixed amount that taxpayers can subtract from their gross income if they do not itemize deductions. The standard deduction amount is $1,500 per individual.
- Personal Exemption: An amount taxpayers can deduct for themselves and their dependents. The personal exemption amount is $1,000 per person.
- Itemized Deductions: Taxpayers may choose to itemize certain expenses instead of taking the standard deduction. Common itemized deductions can include certain medical expenses, charitable contributions, and other specific costs as defined by FSM tax law.
While employers primarily use withholding tables based on gross pay and exemptions claimed, employees should be aware of these deductions and allowances as they impact their final tax liability when filing their annual return.
Tax Compliance and Reporting Deadlines
Employers in the FSM must adhere to specific deadlines for remitting withheld taxes and contributions and for filing required reports.
- Social Security Contributions: Employer and employee contributions are typically due monthly, by the 15th day of the month following the payroll period. Quarterly or annual filing may be permitted for very small employers, but monthly is standard.
- Income Tax Withholding: Withheld income taxes are also typically due monthly, by the 15th day of the month following the payroll period.
- Annual Reporting: Employers are required to file annual reports summarizing employee wages, withheld taxes, and Social Security contributions. This includes providing employees with a wage and tax statement (similar to a W-2) by January 31st of the following year. The employer's annual reconciliation report is typically due by February 28th.
Penalties and interest may apply for late payments or filings. Employers must maintain accurate payroll records for all employees.
Special Tax Considerations for Foreign Workers and Companies
Foreign individuals working in the FSM and foreign companies operating there have specific tax considerations.
- Foreign Workers: Non-resident individuals working in the FSM are generally subject to FSM income tax on their FSM-sourced income. Employers must withhold income tax from their wages just as they would for resident employees. Non-resident workers are also subject to FSM Social Security contributions if they are employed by an FSM-based employer, up to the annual wage base limit. Tax treaty provisions, if any exist between the FSM and the worker's home country, could potentially impact their tax obligations, but the FSM has limited tax treaties.
- Foreign Companies: Foreign companies with a permanent establishment or engaged in trade or business within the FSM are subject to FSM business gross revenue tax and potentially corporate income tax. Regarding employment, a foreign company employing individuals in the FSM is considered an employer and must comply with all FSM payroll tax obligations, including Social Security contributions and income tax withholding, for those employees, regardless of the company's foreign status. Utilizing a local entity or an Employer of Record can simplify compliance for foreign companies.
