Social Security Tax

Updated November 4, 2020

What Is Social Security Tax?

Social Security tax is an employment tax that funds the Social Security program, a mandatory U.S. government program of retirement, disability, and life insurance.

This tax pays for the benefits provided by Social Security, established in 1935 to provide retirement, disability, and survivors’ benefits. Current taxes fund current benefit payments, and they also qualify the taxpayer to receive future benefits. Both taxpayers and employers pay this tax. If the taxpayer is self-employed, he or she pays both the employee and employer shares.

How Does Social Security Tax Work?

The employer withholds the tax for the employee; self-employed taxpayers pay an estimated tax. The Social Security Administration keeps track of lifetime “contributions,” that is, Social Security tax payments, which then become the basis for calculating the amount of the Social Security benefit that the taxpayer receives.

What Is the Social Security Tax Rate?

Currently, the Social Security rate is 12.4%, split evenly by the employer and employee. An additional tax of 2.9% pays for Medicare and Medicaid benefits, so the total tax rate is 15.3%. Self-employed taxpayers must pay the whole rate as both employer and employee, but may deduct half of that amount when filing income taxes. 

Because the tax is paid on a limited amount of income, it is a regressive tax, that is, those with less total income pay a higher percentage of their income for this tax. There are a few Americans who are exempt from paying Social Security tax, but by and large, anyone who works in the U.S. pays Social Security taxes.

What Is the Social Security Tax Limit?

Social Security tax is applied to a limited amount of income earned by employed or self-employed taxpayers. In 2019, that limit was $132,900. There is no income limit on the Medicare tax.

Social Security Tax Example

Jim is self-employed as a consultant. In 2019 he earned $235,000 in taxable income.

As he is self-employed, Jim must pay both the employer and employee portion of Social Security tax. At the 12.4% combined rate, Jim would owe $29,140 in Social Security taxes, if the tax applied to all of his income.

However, Jim only needs to pay Social Security tax on income up to the $132,900 limit, so his Social Security tax is 12.4% of $132,900 or $16,479.60. Jim also is responsible for Medicare taxes at a rate of 2.9% on his entire income (no limit) for an additional $6,815.00. For the year, Jim’s total Social Security/Medicare tax liability is $23,294.60.

Why Is Social Security Tax Important?

Social Security provides benefits for those no longer able to work, through age or disability, or for their survivors after death. It is a safety net for all Americans and is important to our economic security.

About two out of three seniors depend on Social Security for most of their income, and fully 1/3 of seniors rely on it for at least 90% of their income. In short, Social Security’s benefits are modest but essential. 

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