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Social Security Taxes

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The Social Security tax is a tax applied to income related to labor. All employees and self-employed entrepreneurs pay into Social Security through the Social Security tax, which is also known as Old-Age, Survivors, and Disability Insurance (OASDI).

The Social Security tax functions very much like a flat tax. A single rate of 12.4% is applied to wage and self-employment income earned by a worker up to a maximum dollar limit. Half of this tax is paid for by the employee in the form of payroll withholding. The other half of this tax is paid for by the employer. Self-employed persons pay both halves of the Social Security tax since they are both the employee and the employer.

 

Social Security tax rates

Employees pay 6.2% of their wage earnings, up to the maximum wage base.

Employers pay 6.2% of their employee's wage earnings, up to the maximum wage base.

Self-employed persons pay the combined rate of 12.4% 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 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 is subject to the Social Security tax.

Social Security Wage Base by Year

2014: $117,000
2013: $113,700
2012: $110,100
2011: $106,800
Source: Social Security Administration: Contribution and Benefit Base
Earnings up to the Social Security wage base amount have the Social Security tax applied. Earnings over the wage base amount do not have the Social Security tax applied.

The math works like this:

  • If wages are less than $113,700 in the year 2013, then wages times 6.2% is the amount the employee pays and wages times 6.2% is the amount the employer pays.
  • If wages are more than $113,700 in the year 2013, then 113,700 times 6.2% is the amount the employee pays and this is also the same amount the employer pays.

Special Rate Reduction for 2011 and 2012

For the years 2011 and 2012, the Social Security tax rate paid by employees is 4.2% instead of the normal 6.2%. Employers still pay the full 6.2% rate. Thus for 2011 and 2012, the combined Social Security tax rate is 10.4%. Self-employed persons will pay this 10.4% 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, and then further extended through the end of 2012 by HR 3630. The reduced Social Security tax rate was not renewed for 2013 as part of the American Taxpayer Relief Act. For 2013, the Social Security tax reverts to its normal tax rate of 6.2% for employees, 6.2% for employers, and 12.4% for self-employed persons.

Thus for 2011 and 2012, we substitute 4.2% for 6.2% in the above math formulas for the amount paid by the employee. At the maximum wage base of $106,800 for 2011, this translates into a tax savings of $2,136, as follows:

  • Social security tax at the normal rate: 106,800 times 6.2% = $6,621.60
  • Social security tax at the reduced rate for 2011: 106,800 times 4.2% = $4,485.60
At the 2012 maximum wage base of $110,100, this translates into a tax savings of $2,202, as follows:
  • Social security tax at the normal rate: 110,100 times 6.2% = $6,826.20
  • Social security tax at the reduced rate for 2012: 110,100 times 4.2% = $4,624.20
You can plug in your own salary level to determine your own personal savings from the payroll tax holiday. If your earnings from wages and self-employment are less than the wage base, simply multiply your earnings by 2% to find your savings. If your earnings are more than the wage base, you receive the maximum savings of $2,136 (for 2011) and $2,202 (for 2012).

 

Employers have until January 31, 2011 to implement the new withholding rates

The Internal Revenue Service has instructed employers to implement the lower 4.2% Social Security tax rate by January 31, 2011. By that time, you should see a reduction in the amount withheld for Social Security. Some employers label this as "Soc Sec" or "OASDI" on your paystub. Other employers use the label "FICA" which combines both Social Security and Medicare tax withholding.

Employers are also supposed to refund to you any Social Security tax withheld at the higher rate. If employers withheld at 6.2%, they should be refund to you the 2 percentage point difference no later than March 31, 2011.

 

What Happens to the "Missing" Social Security Funds from the 2-Year Tax Rate Reduction?

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 the tax reduction. This is provided for in section 601 of the Tax Relief Act, which reads in part, "There are hereby appropriated to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund established under section 201 of the Social Security Act (42 U.S.C. 401) amounts equal to the reduction in revenues to the Treasury by reason of the application of subsection (a). Amounts appropriated by the preceding sentence shall be transferred from the general fund at such times and in such manner as to replicate to the extent possible the transfers which would have occurred to such Trust Fund had such amendments not been enacted."

 

What is the Social Security Tax For?

The Social Security tax goes directly to the Social Security trust funds and is used to pay for current and future Social Security retirement benefits, benefits for widows and widowers, and disability benefits. Unlike income taxes, which are paid into the general fund of the United States and can be used for any purposes, Social Security taxes are paid into special trust funds that can be used only to fund social insurance benefits.
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