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The social security tax is vital for a well functioning economy and society.
It is vital because it allows us to redistribute the income earned during our prime earning years into our post-retirement years. This is essential in a modern economy in that it ensures that as we age, we are still taken care of.
Social Security Tax Rates
Social Security functions much like a flat tax. Everyone pays the same rate, regardless of how much they earn, until they hit the ceiling. As of 2020, a single rate of 12.4% is applied to all wages and self-employment income earned by a worker up to a maximum dollar limit of $137,700.
Half this tax is paid by the employee through payroll withholding. The other half is paid by the employer. So employees pay 6.2% of their wage earnings up to the maximum wage base, and employers also pay 6.2% of their employee’s wage earnings up to the maximum wage base, for a total of 12.4%.
This 12.4% figure does not include the Medicare tax, which is an additional 2.9% divided between employee and employer.
If You’re Self-Employed
Self-employed persons must pay both halves of the Social Security tax because they’re both employee and employer. They pay the combined rate of 12.4% of their net earnings up to the maximum wage base. This is calculated as the self-employment tax on Schedule SE. In addition, you’ll pay the full 2.9% Medicare tax.
But here’s a bit of good news: You can claim an above-the-line deduction for one-half of your self-employment tax as an adjustment to income. You don’t have to pay income tax on that portion of your earnings.
When you calculate your tax on Schedule SE, it will tell you the total amount of the above-the-line deduction you can claim.
The Social Security Tax Wage Base
All wages and self-employment income up to the Social Security wage base are subject to the 12.4% Social Security tax. The wage base is adjusted periodically to keep pace with inflation. It was increased from $132,900 to $137,700 in 2020. Here’s how it broke down year by year from 2012 to 2018:
|Social Security Wage Base by Year|
How the Math Works
The math works like this:
- If your wages are less than $137,700 in 2020, multiply your earnings by 6.2% to arrive at the amount you and your employer must each pay for a total of 12.4%. If you’re self-employed, multiply your earnings up to this limit by 12.4% to calculate the Social Security portion of your self-employment tax.
- If your wages are more than $137,700 in 2020, multiply $137,700 by 6.2% to arrive at the amount you and your employer must each pay. Anything you earn over this threshold is exempt from Social Security tax. You would do the same but multiply by 12.4% if you’re self-employed.
For taxes due in 2020, refer to the Social Security income maximum of $132,900 because it’s still the 2019 tax year.
If You Work More Than One Job
Keep the wage base in mind if you work for more than one employer. If you’ve earned $69,000 from one job and $69,000 from the other, you’ve crossed over the wage base threshold. Neither employer should withhold any further Social Security tax from your pay—or pay half the 12.4% on your behalf—until year’s end.
It doesn’t matter that individually, neither job has reached the wage base threshold. The wage base threshold applies to all your earned income. But separate employers might not be aware you’ve collectively reached this limit, so you’ll have to notify both employers they should stop withholding for the time being. However, you can always receive reimbursement of any overpayment when you file your taxes.
These are annual figures, so the Social Security tax starts right back up again on Jan. 1 until you hit the next year’s Social Security wage base.
How Is the Social Security Tax Used?
Income taxes you pay are deposited into the general fund of the United States. They can be used for any purpose, but Social Security taxes are different.
These taxes are paid into special trust funds that should only be used to pay current and future Social Security retirement benefits, as well as disability benefits and benefits for widows and widowers. Today’s workers contribute their percentage, which in turn is paid to today’s beneficiaries—those workers who have retired and who are now collecting Social Security benefits. When today’s workers retire, they’ll tap into the benefits being paid by tomorrow’s workers.
Social Security & Medicare Tax Rates
Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program and Medicare’s Hospital Insurance (HI) program are financed primarily by employment taxes. Tax rates are set by law (see sections 1401, 3101, and 3111 of the Internal Revenue Code) and apply to earnings up to a maximum amount for OASDI.
The rates shown reflect the amounts received by the trust funds. In certain years, the effective rate paid by employees, employers, and/or self-employed workers was less than the rate received by the trust funds, with the difference covered by general revenue. See the footnotes for details.
|Calendar year||Tax rates as a percent of taxable earnings|
|Rate for employees and employers, each||Rate for self-employed workers|
|1990 and later b, c||6.200||1.450||7.650||12.400||2.900||15.300|
|a In 1984 only, an immediate credit of 0.3 percent of taxable wages was allowed against the OASDI taxes paid by employees, resulting in an effective employee tax rate of 5.4 percent. The OASI and DI trust funds, however, received general revenue equivalent to 0.3 percent of taxable wages for 1984. Similar credits of 2.7 percent, 2.3 percent, and 2.0 percent were allowed against the combined OASDI and HI taxes on net earnings from self-employment in 1984, 1985, and 1986-89, respectively.
b Beginning in 1990, self-employed workers are allowed a deduction, for purposes of computing their net earnings, equal to half of the combined OASDI and HI contributions that would be payable without regard to the contribution and benefit base. The OASDI contribution rate is then applied to net earnings after this deduction, but subject to the OASDI base.
c For 2010, most employers were exempt from paying the employer share of OASDI tax on wages paid to certain qualified individuals hired after February 3. For 2011 and 2012, the OASDI tax rate is reduced by 2 percentage points for employees and for self-employed workers, resulting in a 4.2 percent effective tax rate for employees and a 10.4 percent effective tax rate for self-employed workers. These reductions in tax revenue due to lower tax rates will be made up by transfers from the general fund of the Treasury to the OASI and DI trust funds. Beginning in 2013, an additional HI tax of 0.9 percent is assessed on earned income exceeding $200,000 for individuals and $250,000 for married couples filing jointly. This additional HI tax rate is not reflected in the tax rates shown in the table.
What Is Social Security Withholding?
The Social Security tax is a federal tax imposed on employers, employees, and self-employed individuals. It is used to pay the cost of benefits for elderly recipients, survivors of recipients, and disabled individuals (OASDI, or Old Age, Survivors and Disability Insurance).
Social Security tax is one of the payroll taxes paid by employees, employers, and self-employed individuals each year known as FICA (Federal Insurance Contributions Act) taxes. Medicare tax is the other tax in this package. There is no maximum on Medicare tax, but there is an additional Medicare tax of 0.9% for high-income taxpayers with earned income of more than $200,000 ($250,000 for married couples filing jointly).
The 2020 Social Security tax rate is 12.4%; 6.2% is paid by the employer, and the employee is responsible for the remaining half. The Medicare rates are 1.45% each, for a total of 2.9%, so the total FICA tax amount is 15.3%. If you are self-employed, you must pay the full 15.3%, but you can take a deduction for half this amount.
Social Security Maximum
Once you reach a maximum set by the Social Security Administration, different rules regarding withholding come into effect.
The employer must withhold Social Security and Medicare taxes from employees on pay subject to Social Security, up to the maximum amount each year. They must pay Social Security taxes for each employee for earnings up to the Social Security maximum.
The Social Security cap is the maximum amount that your employer will withhold from your paychecks during the year. If you have more than one job, each employer will withhold up to the maximum. If too much Social Security tax has been withheld, you can claim a refund from the IRS of those Social Security taxes withheld that exceeded the maximum amount when you file your tax return the following year.
If you are self-employed, you must pay Social Security and Medicare tax on your self-employment earnings (your net income on your business tax return). Since you are not an employee, these amounts aren’t withheld during the year. You must estimate the self-employment tax and income tax you owe from business earnings and make quarterly estimated payments.
For example, if your only income in 2019 was from self-employment, and the net earnings you report on your business tax form were $135,000, you would only be taxed for the self-employment tax on the 2019 maximum of $132,900.
What if I’m an Employee and Also Self-employed?
You must pay Social Security and Medicare tax on both employment income and income as an employee. The employment income is considered first. If the Social Security maximum has not been met, then income from self-employment is used up to the maximum.