The Social Security tax, also known as Old Age, Survivors, and Disability Insurance (OASDI), applies to all income earned from labor. Paying it is pretty much unavoidable if you work. All employees and self-employed taxpayers pay the Social Security tax.
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 2021, 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 $142,800.
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 and to $142,800 for 2021. Here's how it broke down year by year from 2012 to 2021:
|Social Security Wage Base by Year|
How the Math Works
The math works like this:
- If your wages were 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 were 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 were 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 earned 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 2021, refer to the Social Security income maximum of $137,700 as you're filing for the 2020 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.