What Is the Social Security Tax?

The Social Security program, established in 1935, provides monthly financial benefits to workers when they reach retirement age, as well❀ as to survivors of deceased workers (e.g., a spouse or child), and disabled workers.

The Social Security tax is the tax levied on employers and employees to fund the Social Security program in the U.S. The revenue is collected in the form of a payroll tax and a 澳洲幸运5官方开奖结果体彩网:self-employment tax.

The Social Security Tax for Employees

The Social Security tax is mandated by the 澳洲幸运5官方开奖结果体彩网:Federal Insurance꧟ Contribu﷽tions Act (FICA). It pays for the benefits that Americans receive under the Old-Age, Survivors💖, and Disability Insurance (OASDI) program—the official name for Social Security.

The Social Security tax is applied to 澳洲幸运5官方开奖结果体彩网:income earned by employees and self-employed taxpayers. Employers usually withhold this tax from employees’ paychecks and forward 🌞it to the government.

The funds collected for Social Security are not put into a trust for the individual employee currently paying into the fund, but are rather used to pay existing older people in a "pay-as-you-go" system.

The Social Security tax is also collected to support individuals who are entitled to survivorship benefits—benefits paid to a surviving spouse upon the death of their spouse or to a dependent child upon the death of their parent(s).

As of 2024, the Social Security tax rate is 12.4%. Half of the t꧂ax, or 6.2%, is paid by the employer, and the other 6.2% is paid by t🍌he employee.

The Social Security tax rate is assessed on all types of income earned by an employee, including bonuses.

However, there is an income limit above which the tax cannot be applied. The limit for 2024 is $168,600. For 2023, it's $160,200.

The Social Security Tax for Self-Employed Peop✤le

The self-employment tax (which, for self-employed people, includes the Social Security tax) is mandated by the 澳洲幸运5官方开奖结果体彩网:Self-Employed C𒁏ontributions Act (SEC♛A).

It's applied to the 澳洲幸运5官方开奖结果体彩网:net earnings of the self-employed, up to an income limit: $168,600 in 2024, and $160,200 in 2023. Since the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) considers a self-employed individual to be both an employer and an employee, they have to pay 💦the full 12.4% Social Security tax on their own.

The self-employment tax is made up of the Social Security tax and the 澳洲幸运5官方开奖结果体彩网:Medicare tax. As of 2024, the self-employment tax is 15.3% (12.4% Social Security tax + 2.9% Medicare tax). The tax is applied to 92.35% of net business earnings.

Example

Chen, who runs a human resources consulting business, calculates his total net income for 2024 to be $200,000 after 澳洲幸运5官方开奖结果体彩网:business expenses have been deducted. His self-employment tax raไte will be assesse꧙d at 92.35% of $200,000, or $184,700 (.9235 x $200,000).

However, since this amount is above the $168,600 income liꦓmit, his tax bill actually will be 15.3%꧋ of $168,600, or $25,795.80 (.153 x $168,600).

Chen can claim an 澳洲幸运5官方开奖结果体彩网:above-the-line deduction for half of his self-employment tax, or $12,897.90 ($25,795.80 ÷ 2). In effect, he gets a partial refund on the 7.65% employer portion of his self-em🅺ployment tax (6.2% Social Security + 1.45% Medicare).

Exemptions

Not every taxpayer has to pay the Social Security tax. Exemptions are available to specific groups of indiviღd🐈uals, including:

• Members of a religious group who are opposed to receiving Social Security benefits during retirement, if disabled, or after death
• Nonresident aliens—that is, individuals who are neither citizens nor legal residents of the United States, such as people who are in the country temporarily as students
• Nonresident aliens working in the U.S. for a foreign government
• Students who are employed at the same school where they are enrolled, and where employment is contingent upon continued enrollment

Example of Social Security Taxes

The Social Security tax is a 澳洲幸运5官方开奖结果体彩网:regressive tax, meaning that a larger portion of lower-income earners' total income is withheld, compared with that of higher-income earners.

Consider two employees, Aleksandr and Diego. Aleksandr earns $85,000 for the tax year 2024 and has the 6.2% Social Security tax withheld from his pay. The federal government collects $5,270 (.062 x $85,000) from Aleksandr to help pay for retirement, survivorship, and disa﷽bility benefits.

Diego, on the other hand, earns $175,000 for the tax year 2024൲. The Social Security tax rate will only be applieꦦd up to the limit of $168,600.

Therefore, Diego will pay $10,453.20 (.062 x $168,600) as his contribution to the country’s Social Security program for older people, survivors, and people with disabilities. But his 澳洲幸运5官方开奖结果体彩网:effective Social Security tax rate is 6.0% ($10,453.20 ÷ $175,000)🎃. Diego, with a lower income, is taxed at the higher 6.2% rate ($5,270 ÷ $85,000).

The Bottom Line

The Social Security tax (at a rate of 12.4% as of 2024) is applied to the earned income of Americans throughout their working years. The revenue derived from the Social Security tax funds the Old-Age, Survivors, and Disability Insurance (OASDI) program, which is commonly known as Social Security.