What is Social Security Tax

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Many employers and employees ask, “What is Social Security tax?” Over the years, the Social Security tax rate on both employer and employee income has changed. Although the Social Security tax rate changed each year from 2008 to 2015, the rate didn’t change from 2015 to 2016.

Social Security tax is formally known as the Old Age, Survivors, and Disability Insurance Program, or OASDI. OASDI is a federal program designed to provide retirement benefits to U.S. workers and their survivors. Social Security tax is primarily funded by payroll taxes. Unless you earn above a certain threshold amount of USD 118,500 (2016), the Social Security tax percentage rate is fixed. If you’re self-employed, the Social Security tax rate is higher.

Social Security Tax

Almost every working person in the United States pays Social Security tax. It’s imposed upon self-employed persons, employers, and employees. Social Security tax pays retirement benefits and other programs administered by Social Security. Social Security tax is considered a payroll tax and, as such, it’s withheld from most employees’ paychecks:

  • The current Social Security tax rate is 6.2 percent for both employers and employees.
  • FICA tax withholding includes both Social Security tax and Medicare tax.
  • This year, the total FICA tax rate is 7.65 percent (Social Security tax 6.2 percent + Medicare tax 1.45 percent).
  • The Social Security tax rate is calculated on base income. This year’s earned income threshold maximum is USD 118,500. A higher Social Security tax rate of 2.35 percent is applied to every dollar earned above the earned income threshold. The earned income threshold has increased over time.
  • Self-employed people pay a higher Social Security tax and Medicare tax. In 2016, the Social Security tax rate is 12.4 percent and the Medicare tax rate is 2.9 percent (12.4 percent + 2.9 percent), or a total 15.3 percent.

Social Security Tax: Like “Flat Tax

Social Security tax is a single rate per year that’s applied to an employer or employee’s wages and/or self-employment income up to the maximum established earned-income level for that tax year.

Employers and employees fund the Social Security system. Employees pay about 50 percent of the tax. Employers pay the rest:

  • To calculate your Social Security tax, multiply earnings up to USD 118,500 by .0625.
  • For instance, if you earn USD 50,000 per year, your Social Security tax is USD 3,125.
  • Unlike other payroll deductions, such as funds withheld for benefits programs or a retirement plan, your Social Security tax isn’t reserved in a special account.

Self-employed individuals, as both employer and employee, pay 100 percent of the Social Security tax on IRS Schedule SE.

Social Security Tax for Self-Employed People

If an individual’s only income is derived through self-employment, the Social Security tax maximum remains in effect. This means the Social Security part of your total self-employment tax can’t be more than your company’s maximum profit (depending on that tax year):

  • For instance, if your Schedule C self-employment-net earnings are USD 125,000 this year, you’re only taxed on the maximum USD 118,500 threshold.
  • If you earned money from both employment (e.g., wages and/or tips) and self-employment, the self-employment tax rate of 15.3 percent—including the Social Security tax rate of 12.4 percent—applies.

Additional rules apply if you’re employed and make additional income from self-employment.

Social Security for Employed/Self-Employed People

According to the Internal Revenue Service, any self-employment income that doesn’t have payroll tax withholding and isn’t derived from investment income or passive sources is self-employment income. Self-employment Social Security tax rules apply to independent contractors as well as self-employed business owners.

  • If you’re employed by another business but make some money in a part-time activity, the income is considered self-employment income.
  • If the net income is greater than USD 400 or you earned more than USD 108.28 from employment performed to a religious organization, the income is considered self-employed income.
  • If you’re employed by another business but earn some self-employment income, deduct the Social Security tax withheld from your paychecks by the employer from self-employment income. Multiply the net income by 15.3 percent to arrive at the amount owed.

Remember that self-employment income is what’s left after you subtract all IRS-allowed deductions. It’s possible to deduct office supplies, office furniture, car miles used for business, etc. Only the net amount of self-employment income is subject to Social Security self-employment tax.

Social Security Tax Function

Unlike income tax, Social Security tax is paid to a Social Security special trust. The funds paid to Social Security are used to pay retirement benefits for current and future Social Security beneficiaries. These taxes also fund other programs managed by Social Security for elderly and disabled people.

It’s easy to review your Social Security account online. Go to “My Account” on the Social Security website to check current credits and Social Security tax paid at https://www.ssa.gov/myaccount/