Social Security Tax

What Is the Social Security Tax?

Social Security tax is the tax imposed on the two employers and employees to fund the Social Security program in the U.S. Social Security tax is collected as a payroll tax commanded by the Federal Insurance Contributions Act (FICA) or a self-employment tax commanded by the Self-Employed Contributions Act (SECA).

The Social Security tax pays for the retirement, disability, and survivorship benefits that huge number of Americans receive every year under the Old-Age, Survivors, and Disability Insurance (OASDI) Program — the official name for Social Security.

How the Social Security Tax Works

The Social Security tax is applied to income earned by employees and self-employed taxpayers. Employers as a rule withhold this tax from employees' paychecks and forward it to the government. The funds collected from employees for Social Security are not put into a trust for the individual employee presently paying into the fund, yet rather are utilized to pay existing older individuals in a "pay-as-you-go" system.

Social Security tax is likewise collected to support individuals who are qualified for survivorship benefits — benefits paid to an enduring spouse upon the death of a spouse or to a dependent child upon the death of a parent.

Starting around 2021, the Social Security tax rate is 12.4%. Half of the tax, or 6.2%, is paid by the employer, and the employee is responsible for paying the other half. %. The Social Security tax rate is assessed on a wide range of income earned by an employee, including salaries, wages, and bonuses. In any case, there is an income limit to which the tax rate is applied. For 2021, the Social Security tax is taken from income up to an annual limit of $142,800; any amount earned above $142,800 isn't subject to Social Security tax.

$147,000

The base wage level limit for Social Security taxes in 2022. Any earnings above $147,000 are not subject to withholdings for Social Security.

Social Security Tax for the Self-Employed

Social Security tax is likewise taken from the earnings of the self-employed. Since the Internal Revenue Service (IRS) believes a self-employed individual to be both an employer and an employee, they need to pay the full 12.4% Social Security tax. The Social Security tax is applied to all net earnings up to the wage limit. The self-employment tax is comprised of the Social Security tax and Medicare tax. Starting around 2021, the self-employment tax is 15.3% (12.4% Social Security tax + 2.9% Medicare Tax). The self-employment tax is simply applied to 92.35% of net business earnings.

Here is a model: Ike, who runs a human resources counseling business, works out his total net income for the year to be $200,000 after business expenses have been deducted. His self-employment tax rate will be assessed on 92.35% x $200,000 = $184,700. Since this amount is above the capped limit, his tax bill will be 15.3% x $137,700 (limit) = $21,068.01. Ike can claim a above-the-line deduction for half of his self-employment tax, or $21,068.01 \u00f7 2 = $10,534.05. In effect, he has the money in question returned on the employer portion (6.2% Social Security + 1.45% Medicare = 7.65%) of his self-employment tax.

Exemptions

Few out of every odd taxpayer needs to pay Social Security tax. Exemptions are accessible to specific groups of individuals, including:

• Individuals from a strict group who are against getting Social Security benefits during retirement, whenever disabled, or in the afterlife
• Nonresident outsiders — that is, individuals who are neither residents nor legal occupants of the United States, who are in the country briefly as understudies
• Nonresident outsiders working in the U.S. for a foreign government
• Understudies who are employed at similar school where they are enrolled, and where employment is contingent upon proceeded with enlistment

Illustration of Social Security Taxes

The Social Security tax is a regressive tax, implying that a bigger portion of lower-income earners' total income is kept, compared with that of higher-income earners. Think about two employees, Izzy and Jacob. Izzy earns $85,000 for the tax year 2020 and has a 6.2% Social Security tax kept from his pay. The federal government, in effect, gathers 6.2% x $85,000 = $5,270 from Izzy to help pay for retirement and disability benefits.

Jacob, then again, earns $175,000 for the tax year 2020. The Social Security tax rate may be applied up to the limit of $137,700 (The Social Security tax limit for 2020 is $137,700; the limit leaps to $142,800 in 2021). Therefore, Jacob will pay 6.2% x $137,700 = $8,537.40 as his contribution to the country's Social Security account for older endlessly individuals with disabilities, however his effective Social Security tax rate is $8,537.40 \u00f7 $175,000 = 4.87%. Izzy, with a lower income for every annum, is effectively taxed at 6.2% (i.e., $5,270 \u00f7 $85,000).

Even households that earn a level of income to which next to zero federal income tax will be applied may in any case have Social Security tax taken from their pay. A single taxpayer who earns $10,000 gross income in a given year, for instance, will have zero income tax liability, yet 6.2% may in any case be taken for Social Security.

Features

• Self-employed individuals pay the employer and employee portions of Social Security tax, however just on 92.35% of net business earnings.
• Social Security taxes fund the retirement, disability, and survivorship benefits that large number of Americans receive every year from the Social Security Administration.
• Certain groups, including a few nonresident outsiders and individuals from strict groups with specific perspectives, are exempt from paying Social Security tax.
• In 2021, the Social Security tax rate is 12.4%, separated evenly among employers and employees, on a maximum wage base of $142,800.