How Are Social Security Taxes Calculated?

The Old Age, Survivors, and Disability Insurance (OASDI) tax, commonly known as the Social Security tax, is essential for funding the benefits provided to retirees and those unable to work due to disability. Let’s break down how this tax is calculated, who pays it, and other crucial details.

Basics

The Social Security tax is deducted from employee paychecks and for self-employed individuals, it’s included in their quarterly tax payments. Employers pay a matching share of each employee’s tax, meaning they each pay 6.2% of the employee’s compensation. For self-employed individuals, they pay the full 12.4% since they act as both employer and employee.

Key Takeaways

  • Employees and Employers: Each pays 6.2% for a combined total of 12.4%.
  • Self-Employed: Pay the full 12.4%.
  • Tax Cap: The maximum amount of income subject to this tax is $168,600 for the year 2024.

How It Works

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Social Security, alongside Medicare, is funded through Federal Insurance Contributions Act (FICA) taxes. The Social Security portion of FICA is noted on your pay stub as OASDI. This tax funds benefits for retirees and the disabled, with eligibility starting after 10 years of contributions. Benefits are calculated based on an individual’s earnings history.

Wages Subject to Taxation

For 2024, the maximum taxable income for Social Security is $168,600, capping the annual employee contribution at $10,453.20. This cap is adjusted annually for inflation and can be found in IRS publications.

Income subject to this tax includes:

  • Salaries
  • Bonuses
  • Commissions
  • Paid vacation or sick time
  • Elective contributions to retirement plans

Wages Not Subject to Taxation

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Certain benefits are not considered wages for FICA tax purposes:

  • Employer-paid accident or health insurance premiums
  • Employer contributions to Health Savings Accounts (HSAs)

For example, if you earn $30,000 annually and contribute $4,000 to a 401(k) plan, your Social Security taxable income remains $30,000.

Tax Overpayments

If you work multiple jobs and your combined earnings exceed the taxable income cap, you may overpay the Social Security tax. Any overpayment is credited to your federal tax bill or refunded. Employers still match contributions but do not receive refunds.

Calculating Social Security Taxes

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If you earn $165,240 per year ($13,770 per month), you will pay $853.74 monthly in Social Security taxes, as this income falls under the $168,600 annual cap. A self-employed person with the same income would pay double, totaling $1,707.48 per month.

History

Established in 1935, the initial tax rate was 1% in 1937. Over the years, the rate has increased, reaching 6.2% in 1990, where it remains except for brief reductions in 2011 and 2012.

Tax Cap Changes

Since 1937, the tax cap has been periodically adjusted to keep pace with wage growth and inflation. Initial caps started at $3,000, increasing significantly over the decades to the current $168,600.

Fiscal Concerns and Adjustments

To address potential insolvency due to demographic changes, analysts often propose increasing the Social Security tax rate. However, political and public resistance typically hampers these efforts.

A Regressive Tax

The Social Security tax is considered regressive because it applies only up to the income cap. Higher earners effectively pay a lower percentage of their total income compared to lower earners.

Taxes on Social Security Benefits

Depending on total income, a portion of Social Security benefits may be subject to federal income tax:

  • Single filers: Income below $25,000 – tax-free; $25,000-$34,000 – 50% taxable; over $34,000 – 85% taxable.
  • Married, filing jointly: Income below $32,000 – tax-free; $32,000-$44,000 – 50% taxable; over $44,000 – 85% taxable.

Knowing the Social Security tax is crucial for both employees and self-employed individuals. It’s essential to know how much you need to pay, how it’s calculated, and the implications for your overall tax obligations. By staying informed, you can ensure that you’re meeting your tax responsibilities accurately.

FAQs

How much is the Social Security tax rate?

6.2% for employees and employers, 12.4% for self-employed.

What is the 2024 income cap for Social Security tax?

$168,600.

Are 401(k) contributions subject to Social Security tax?

Yes, elective deferrals are subject.

What happens if I overpay Social Security tax?

Overpayments are credited or refunded.

How are Social Security benefits taxed?

Based on total income, up to 85% may be taxable.

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