Social Security Maximum Withholding Through 2020

What Businesses and Individuals Need to Know About Maximum Withholding

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Each year the Social Security Administration unveils the benefit amounts and maximum withholding based on cost-of-living increases. This formula affects how much can be withheld from employee's paychecks to pay Social Security taxes. Employers are also on the hook for their share of Social Security.

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.

Employer

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.

Employee

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. 

Self-Employed

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 $135,0009, 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.

Article Sources

  1. IRS. "What Is the Additional Medicare Tax?" Accessed Feb. 3, 2020.

  2. IRS. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed Jan. 19, 2020.

  3. IRS. "Self-Employment Tax (Social Security and Medicare Taxes)" Accessed Jan. 19, 2020.

  4. IRS. "Instructions for Form 941," Download PDF, Page 8. Accessed Jan. 19, 2020.

  5. IRS. "Topic No. 608 Excess Social Security and RRTA Tax Withheld." Accessed Jan. 19, 2020.

  6. Social Security Administration. "Maximum Taxable Earnings." Accessed Jan. 19, 2020.