If you work in the US then you must pay Social Security Tax. Not only that but you must also pay Medicare Tax. If you are a regular employee of a company then this is done for you automatically. The payroll department calculates how much to withhold and adjusts your paycheck accordingly. Then they fork it over to the US Treasury on your behalf and this becomes your contribution to the Social Security system. When you retire, you will be able to take advantage of the system by receiving Social Security checks based on your life wages.
Employer Contributions to the Social Security System
Your employer sends your wage contributions for you, and then matches them so the money that goes into the system is actually double what’s taken out of your paycheck. So, if your pay stub shows that you paid $150 to Social Security taxes, then for that pay period the actual amount that went to the Treasury on your behalf was $300, or double. Your employer is bound by law to pay that other half.
Again, same goes for Medicare Tax. You pay half in pre-tax wages and your employer pays the other half.
Social Security Tax and the Self-Employed
What if you work for yourself? Then, lucky you! You get to pay both halves of the Social Security Tax and the Medicare Tax. Now it’s called the Self-Employment Tax but it’s really the Social Security Tax and Medicare Tax, times two.
Any self-employment income over $400 for the year is subject to Social Security Tax (& Medicare tax). You report this on Schedule SE (stands for “self employment”), which attaches to your 1040. You cannot use the 1040 EZ if you are self employed.
While it really isn’t great that you basically pay double in Social Security taxes when you work for yourself, there is one good bonus: you get to deduct the employer’s share of the taxes paid. So, if you pay $8000 in a year for the employer’s half of Social Security taxes, that much gets lopped off your taxable income. That’s a pretty good savings but obviously not as great as not having to pay the tax at all.
What’s the Social Security Tax Rate?
For employees who receive wages, and whose employers perform withholding on their paychecks, the Social Security tax rate is 6.2%. That’s fro Old-Age, Survivors, and Disability Insurance (OASDI). The Medicare tax rate is 1.45% (that’s for Hospital Insurance). That’s a total of 7.65% of wages paid for taxes. Again, the employer pays that too.
Since self-employment tax rate is double that, the self-employed pay 12.4% and 2.9%, respectively. That’s a total of 15.3% paid out of income to Social Security and Medicare Taxes.
Those rates are for 2013, 2014 and on. For a short time the employee’s half was reduced to 4.2%. This was for tax years 2011 and 2012 only. The employer’s half remained at 6.2%.
The tax for Social Security applies to all earnings up to $117,000. Any income above that and it’s not taxed. Not so with the Medicare tax, however. This tax applies to all earnings with no limit. In addition to that, there is now an Additional Medicare Tax, which applies to high-income earners. This is an additional .9%.
What Will the Social Security Tax Give Me When I Retire?
When you retire, you’ll start getting your Social Security check (or direct deposit). There’s a maximum benefit of $2,642 per month. That goes up 1.5% each year to adjust for cost of living. Full retirement age is 66. You can wait until your full retirement age to get the maximum benefit or you have the option of retiring early but taking smaller Social Security benefits each month.
Where Do I Find Out About Social Security?
The Social Security Administration is the federal government office in charge of benefits. You should get a statement each year in the mail, outlining how much you’ve paid into the system year by year. The statement will give you your benefit amount for different retirement ages, based on the amount you’ve worked to date. Their website is www.ssa.gov.
You can apply for your Social Security benefits online, use the Retirement Estimator, or learn about Social Security through the many articles and pamphlets available for download. It’s a very useful site and it’s designed to be user-friendly so check it out.