Learn About Social Security Taxes
Get the 2017 Rates and an Explanation of the Purpose of the Tax
The Social Security tax applies to all income related to labor, so if you work, paying it is pretty much unavoidable, 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 or OASDI.
Social Security Tax Rates
Half this tax is paid by the employee in the form of payroll withholding. The other half is paid by the employer. Self-employed persons pay both halves of the Social Security tax because they're both the employee and the employer.
Employees pay 6.2 percent of their wage earnings in 2017, up to the maximum wage base. Employers also pay 6.2 percent of their employee's wage earnings up to the maximum wage base. These rates are unchanged from 2016.
Self-employed persons 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 then turn around and 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.
In a manner of speaking, you get the employer half of your Social Security tax back—or, at least, you don't have to pay income tax on that portion of your income. Schedule SE tells you the total amount of the 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 it's broken down since 2011:
Social Security Wage Base by Year
|Source: Social Security Administration, Contribution and Benefit Base|
Earnings over $127,200 are not subject to the Social Security tax as of 2017. As this chart shows, this threshold tends to go up periodically to keep up 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 $127,200, 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.
- If your wages are more than $127,200 in 2017, use this figure—$127,200—times 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.
What Is the Social Security Tax For?
Unlike income taxes, which are paid into the general fund of the United States and can be used for any purpose, Social Security taxes are 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 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 those 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 extended through February 2012 by HR 3765.
It was then further extended through the end of 2012 by HR 3630. 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 reduction.