Social Security Tax

Payroll taxes are withheld, remitted, and filed on behalf of employees by their employers. You may also contribute to some taxes on their behalf. One of those necessary levies that affects both the company and the employee is the Social Security tax.

What is the Social Security Tax ?

Employers and employees are both subject to the Social Security tax, which is used to pay for the U.S. Social Security program. Federal Insurance Contributions Act (FICA) mandated payroll taxes or Self-Employed Contributions Act (SECA) mandated self-employment taxes are the two ways that Social Security tax is collected.

Social Security is a mandatory payroll tax paid by employers and employees. In the US, both employers and employees are required to pay the tax. This means that in addition to deducting Social Security taxes from employees paychecks, employers must also contribute a matching amount to Social Security, which is equal to the employee tax, and deposit both amounts with the Social Security Administration. If you work, paying it is essentially inescapable.

The Old-Age, Survivors, and Disability Insurance (OASDI) Program, which is what Social Security is officially known as, provides retirement, disability, and survivorship benefits to millions of Americans each year.

The Federal Insurance Contributions Act requires all employers to withhold one of two taxes, the other being the Social Security tax. The Medicare Tax is the other. Additional Medicare tax is mandated by FICA as well, but only for those who make more money than a certain threshold.

Most employees, employers, and self-employed individuals are required to pay the Social Security tax, which is a portion of gross wages, in order to support the federal program. The social security tax is waived for several taxpayer categories. Employers are responsible for deducting the appropriate amount of Social Security tax from each employee's paycheck and sending it to the federal government on time. There may be severe repercussions for doing otherwise. The only tax with a wage base cap is social security. The maximum wage for that year that is subject to tax is known as the wage base limit.

Self-employed people typically have to pay both income tax and self-employment tax (SE tax). A Social Security and Medicare tax known as the SE tax is mostly applied to people who work for themselves. It is comparable to the Social Security and Medicare taxes that are deducted from most wage employees' paychecks. Whenever the phrase "self-employment tax" is used, it typically only refers to Social Security and Medicare taxes, not any other taxes.

Self-employment exempts you from paying Social Security tax. You pay self-employment tax as an alternative. Paying both the employer and employee halves of the total FICA tax is comparable to paying self-employment tax. Self-employed people are required to pay this tax under the Self-Employed Contributions Act (SECA).

Key Facts of Social Security Tax

  • All income earned from labor are subject to the Social Security tax, commonly known as Old Age, Survivors, and Disability Insurance (OASDI).
  • One of the two Federal Insurance Contributions Act (FICA) taxes is Social Security. The Medicare tax is the other.
  • Taxpayers who are both employed and self-employed must pay Social Security tax.
  • The retirement, disability, and survivorship benefits that the Social Security Administration provides to millions of Americans each year are paid for by Social Security taxes.
  • The employer and employee components of Social Security tax are paid by self-employed people, but only on 92.35% of their net company earnings.
  • Some non-resident foreigners and members of religious groups with particular ideologies are excluded from paying Social Security tax.

How Does the Social Security Tax Works ?

Both self-employed taxpayers and those who are employed are subject to the Social Security tax on their income. This tax is typically deducted by employers from employee paychecks and sent to the government. Instead of being placed in a trust for each employee who is currently contributing to the fund, the money raised from employees for Social Security is used in a "pay-as-you-go" system to compensate existing older people.

Those who are eligible to survivorship benefits, which are benefits provided to a surviving spouse after the death of a spouse or to a dependent child after the death of a parent, are also supported by the Social Security tax.

All sources of income received by an employee, including salaries, wages, and bonuses, are subject to the Social Security tax rate. The tax rate, however, is only imposed up to a certain amount of income. The cap on the Social Security tax base wage in 2022. Any earnings above $147,000 are not subject to withholding's for Social Security.

What is the Use of Social Security Tax ?

Your income taxes are deposited into the general fund of the United States. With the exception of Social Security taxes, they can be used for anything. These taxes are placed into trust accounts that are only to be used to pay for widow and widower payments, disability benefits, and present and future Social Security retirement benefits. The Social Security benefits paid to today's beneficiaries—those employees who have retired and are already collecting them—are funded in part by the percentage of today's workers that they contribute. The benefits that tomorrow's workers will be paying for will be used by today's workers when they retire.

Social Security benefits are paid for by Social Security taxes collected by the federal government. The Social Security Administration (SSA) oversees the program and makes use of the tax money to:
  • Retired individuals
  • Widows and widowers
  • Individuals with disabilities
  • Children and survivors of individuals
Social Security is formally known as Old-Age, Survivors, and Disability Insurance (OASDI). The majority of those who benefit from the tax break are 65 years of age or older. Payments for survivors are made to the surviving wives or children of deceased or retired employees.

Who has to Pay Social Security Tax ?

Your employer will take Social Security taxes from your wages if you are an employee in the United States. If you work for yourself, you are in charge of paying your own Social Security taxes. Most employees are required to contribute Social Security taxes up to IRS limits in both circumstances.

Some people may qualify for a temporary student exemption or a religious exemption in specific situations. Nonresident foreigners and foreign government employees may not additionally be compelled to pay Social Security taxes. Finally, those who earn insufficient income may avoid contributing to Social Security.

Social Security Tax for Self-Employed

Social Security tax is also taken from the earnings of the self-employed. The whole 12.4% Social Security tax must be paid by a self-employed person since the Internal Revenue Service (IRS) views them as both an employer and an employee. Up to the wage ceiling, all net earnings are subject to the Social Security tax. Social Security and Medicare taxes make up the self-employment tax.

Because they are both an employer and an employee, self-employed people are required to pay the full Social Security tax. Up to the maximum wage base, they pay a combined rate of 12.4% of their net earnings. The self-employment tax is used to calculate this on Schedule SE. You will also be required to pay the full 2.9% Medicare tax. 92.35% of net business income is the sole amount to which the self-employment tax is applied.

However, there is some good news, as an adjustment to income, you can deduct one-half of your self-employment tax above the line. On that portion of your income, no income tax is due. The exact amount of the above-the-line deduction you are eligible to claim will be revealed when you calculate your tax on Schedule SE.

If You Have Multiple Jobs

If you have more than one employer, keep the wage base in mind. You have over the wage base level if you made $69,000 from one job and $69,000 from another. Until the end of the year, neither of your employers should deduct any further Social Security taxes from your wages or pay half of the 12.4% on your behalf.

It doesn't matter that neither job has yet to earn enough to meet the pay base requirement on its own. For all of your earned income, the wage base threshold is applicable. You'll need to inform both employers that withholding should cease temporarily because it's possible that your individual employers are unaware you have collectively hit this limit. You can always request a refund of any over-payment when you file your taxes, though. Since these are annual values, the Social Security tax resumes on January 1 and continues until you reach the Social Security pay base for the next year.

Social Security Tax Exemptions

The Social Security tax is not required of every taxpayer. Certain categories of people are eligible for exemptions, including :
  • Individuals who belong to a religious group and who reject obtaining Social Security benefits in retirement, in the event of disability, or in the event of death.
  • Nonresident aliens or people temporarily studying in the United States but who are neither citizens nor authorized residents of the country.
  • Non-resident foreigners employed by a foreign government in the United States.
  • Students whose work is based upon maintaining enrollment at the same institution where they are enrolled.

What is the Social Security Tax Rates ?

In many ways, Social Security works like a flat tax. No matter how much money they make, everyone pays the same rate until they reach the cap.

There is a flat rate of 12.4% applied to the entire Social Security tax. The employee withholds half of this tax through paycheck withholding. Half of the tax is paid by both the employer and the employee. The Social Security employee tax is 6.2%, and the employer pays is 6.2%. Contribute your half based on the employee's gross taxable wages after deducting the percentage from those wages.

Social Security taxes have a wage base. Thus, Social Security tax is only applied to a portion of employee wages. In 2024, the Social Security tax limit is $168,600.

Note :
The Medicare tax, which is an additional 2.9% that is split between the employee and the employer, is not included in this 12.4% number.

What is a Wage Base ?

When an employee's wages reach the wage base for the calendar year, you stop deducting and contributing to their tax. This is known as the wage base for Social Security. Every year, wage bases typically rise to keep up with the rising cost of living.

The total FICA tax rate (including Social Security and Medicare) is 15.3%. Similar to Social Security, employers and employees are each responsible for paying half of the Medicare tax (2.9% total, 1.45% each). The Medicare tax does not use the Social Security wage basis. Once an employee's wages reach the Social Security wage base, you must continue withholding Medicare tax. On wages over $200,000, Medicare includes an extra tax rate of 0.9%.

Generally, regardless of age or whether a worker is receiving Social Security benefits, Social Security tax is paid on their wages. Some earnings, such as those used to repay employees for expenses, are excluded from Social Security tax. Publication 15 has more details on exempt wages.

How to Calculate Social Security Tax ?

Multiply the employee’s gross taxable wage by the Social Security tax rate to calculate Social Security tax. Pay frequency is irrelevant. The tax is always determined in the same way.

Let's say that the employee receives $1,000 in gross salary. To calculate how much should be deducted from the employee's pay, multiply the $1,000 by 6.2%. Use the computed amount to establish your contribution because it is the same as yours.

Social Security tax is $62 ($1,000 x 0.062)

Withhold $62 from the employee's wages and add $62 to the employer's tax contribution.

Stop withholding and contributing Social Security taxes from an employee's paycheck if they earns $168,600 in 2024. Keep withholding and contributing to the tax even if the employee's pay never reaches the annual wage base.

Where to Report Social Security Tax ?

Deposit Social Security taxes on either a monthly or semiweekly basis, along with Medicare and federal income taxes. Your deposit schedule is based on the taxes you previously reported on Forms 941 or 944 for a look back period.

The majority of employers are required to use Form 941, Employer's Quarterly Federal Tax Return, to report FICA taxes and federal income tax withholding on a quarterly basis. Give a breakdown of the total Social Security contributions and amount withheld made for each employee.

Some employers can record Social Security taxes deducted and contributed using Form 944, Employer's Annual Federal Tax Return. Medicare and federal income taxes are also reported on the annual form. If a business is eligible to use Form 944, the IRS notifies applicable employers. Employers who owe less than $1000 in annual federal income, Social Security, and Medicare taxes are typically considered to be relevant employers. Use Form 944 only if instructed to do so by the IRS.

Send the IRS the proper form after you've completed it. Determine where to submit your quarterly return by using the IRS Form 941. Annual filers can find out more on where to mail their returns by visiting the IRS Form 944.

You must provide a Form W-2 to each of your employees by January 31 of each year. The total amount of employment taxes deducted from their wages over the course of the previous year is listed on this form.

The Social Security Administration will also receive Forms W-2 and W-3 (the summary transmittal form), which are used to report the taxes withheld during the year. By January 31st, Forms W-2 and W-3 must be submitted. These forms might also need to be sent to the state tax office.

How to Pay Social Security Tax ?

Publication 15 has more information on the lookback period and how to choose your deposit schedule. Verify your lookback period before the start of each calendar year because it is subject to change. Payroll taxes must be deposited using EFTPS. Payment penalties could apply to late tax deposits.

Frequently Asked Questions

In the USA, is Social Security tax mandatory?
In most circumstances, you must pay social security and Medicare taxes if you work as an employee in the United States. Your social security benefits under the American social security system are a result of your payment of these taxes. These taxes are withheld by your employer from each wage payment.

Who pays Social Security tax in United states? 
Both employers and employees must pay Social Security tax. Employers and employees each contribute 6.2 percent of wages, while self-employed individuals contribute 12.4 percent.

Is it possible to avoid paying Social Security tax?
Get Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits from the Internal Revenue Service, to make a request for a Social Security tax exemption.

Who is exempt to pay Social Security?
Religious members of particular organisations are frequently exempt. If they are non-immigrant and non-resident aliens, the majority of foreign professors and researchers are exempt. Self-employed individuals with annual incomes under $400 are exempt from Social Security taxes.

Does the Social Security tax get back?
The Social Security tax credit is a credit against your potential tax liability, much like the amount of payroll taxes your employer withheld. You will get a refund if all of your tax credits exceed your tax obligation.

Why must I contribute to Social Security?
They pay those who are now receiving benefits with money from your taxes. Any money left over is sent to the Social Security trust funds, not to a bank account in your name. A lot of people just consider Social Security as a retirement program.

When do you stop paying Social Security taxes?
If you were born between 1943 and 1954, your full retirement age is 66, which you can reach at age 67. If you were born between 1955 and 1960, your full retirement age will steadily rise until it reaches 67. Full retirement benefits begin to accrue for people born in 1960 or later at age 67.

Why is Social Security taxed twice?
Based on how the program was financed, the case for taxing Social Security benefits was made. Employers contributed the other half of the payroll tax, with employees contributing the first half from their post-tax income.

Do those with green cards pay Social Security?
Social security for those with permanent residency or green cards. You accrue social security credits by paying Social Security taxes while working in the United States. Up to four credits may be earned every calendar year.

What is the tax rate on Social Security in 2022?
The statutory OASDI tax rate for wages earned in 2022 is 6.2 percent for both employers and employees. In 2022, a person whose salary is equal to or greater than $147,000 would pay $9,114.00 into the OASDI scheme, and so would his or her employer. In 2022, the OASDI tax rate on self-employment income will be 12.4%.