Social Security Taxes—Who Pays What and How Much?
The good news is that some of your earnings might be exempt from this tax
The Social Security tax applies to all income related to labor. Paying it is pretty much unavoidable if you work, at least on some of your earnings. All employees and self-employed taxpayers pay the Social Security tax, which is also known as Old Age, Survivors, and Disability Insurance (OASDI).
Social Security Tax Rates
The Social Security tax functions much like a flat tax. Everyone pays the same rate regardless of earnings...with one exception.
As of 2018, a single rate of 12.4 percent is applied to all wages and self-employment income earned by a worker, but only up to a maximum dollar limit.
Half this tax is paid by the employee through payroll withholding. The other half is paid by the employer. So employees pay 6.2 percent of their wage earnings up to the maximum wage base, and employers also pay 6.2 percent of their employee's wage earnings up to the maximum wage base.
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 percent of their net earnings from self-employment up to the maximum wage base. This is calculated as part of the self-employment tax on Schedule SE. The self-employment tax includes both Social Security taxes and Medicare taxes.
But here's a bit of good news. You can claim an above-the-line deduction for one-half of your overall self-employment tax on the first page of Form 1040 as an adjustment to income if you're self-employed.
You get the employer half of your Social Security tax back in a manner of speaking—or, at least, you don't have to pay income tax on that portion of your income. 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 Math Behind the Social Security Tax
All wages and self-employment income up to the Social Security wage base in effect for a given year are subject to the Social Security tax.
Here's how the wage base has broken down year by year since 2012:
Social Security Wage Base by Year
|Source: Social Security Administration, Contribution and Benefit Base|
Earnings over $128,400 are not subject to the Social Security tax as of 2018. As this chart shows, this threshold tends to go up periodically to keep pace with inflation. The increase from 2016 to 2017 was one of the steepest in years.
The math works like this:
- If your wages are less than $128,400, multiply the amount of your earnings by 6.2 percent to arrive at the amount you and your employer must each pay for a total of 12.4 percent. Multiply by 12.4 percent to calculate the Social Security portion of your self-employment tax if you're self-employed.
- If your wages are more than $128,400 in 2017, multiply $128,400 by 6.2 percent to arrive at the amount you and your employer must each pay. Anything you earn over this threshold is Social Security tax-free. You would do the same but multiply by 12.4 percent if you're self-employed.
Wait! Isn't the Wage Base $128,700 in 2018?
The Social Security Administration initially announced in 2017 that the wage base for 2018 would be $128,700.
Then it revised the number on November 27, 2017, officially dropping it to $128,400. This is the correct figure, despite what you might have read or heard to the contrary, so use $128,400 in your calculations.
Yes, this works in your favor. It's $300 less that you have to earn to be in the clear.
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 $64,200 from one job and $64,300 from the other, you've crossed over the wage base threshold so Social Security tax should no longer be withheld from your pay until year's end. But separate employers might not be aware that you've collectively reached this limit, so you'll have to notify both employers that they should stop withholdings from your pay for the time being.
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.
What Is the Social Security Tax For?
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.
They're paid into special trust funds that can only be used to pay for 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 in by tomorrow's workers.
There Was a Special Rate Reduction in 2011 and 2012
The Social Security tax rate paid by employees was only 4.2 percent in 2011 and 2012. Employers still paid the full 6.2 percent rate, but employees caught a temporary break. The combined Social Security tax rate for employers and employees was only 10.4 percent during these years. Self-employed persons paid this 10.4 percent combined rate on their earnings.
This special payroll tax holiday was enacted as part of the Tax Relief Act of 2010, then it was extended through February 2012 by HR 3765. It was then extended again through the end of 2012 by HR 3630. But the reduced Social Security tax rate was not renewed in 2013 as part of the American Taxpayer Relief Act, so it reverted back to the current rate of 6.2 percent for employees, 6.2 percent for employers, and 12.4 percent for self-employed persons.
To prevent Social Security from losing tax revenue, Congress mandated that revenues be transferred from the general fund to the Social Security trust funds to make up for this two-year tax rate reduction.