How Much is Social Security Tax: Everything You Need to Know
You may be wondering how much social security tax is. The Federal Insurance Contributions Act, otherwise known as the Payroll Tax or Self-Employment Tax.4 min read
How Much is Social Security Tax?
You may be wondering how much social security tax is. The Federal Insurance Contributions Act, otherwise known as the Payroll Tax or Self-Employment Tax, states that a percentage of the wages earned should go toward the Social Security and Medicare fund.
Who Pays Social Security Tax?
Employees pay half and employers pay half, which they then deduct on their federal income taxes because it is as if they are increasing their employees' pay by 6.2% by contributing this stipulated amount. Those who are self-employed pay the total amount and then benefit from a tax deduction as an adjustment on their annual return.
Social Security Taxes must be paid by all workers and employers, per the Federal Insurance Contributions Act which includes a Medicare Tax and Social Security Tax. You will either pay a portion of the amount or the full amount depending on if you are self-employed or an employee.
While funding other people's retirement seems unfair at the moment, when the checks start rolling in for your retirement, you will reap the harvest of the dollars you invested. During 2011 and 2012, politicians lowered the percentage American workers were expected to pay to 4.2% in order to boost the economy. The self-employed paid 10.4% on average. Employers still contributed the full 6.2%.
How Much Is Social Security Tax?
Currently, the Social Security Tax is 12.4% of approximately the first $127,000 of yearly income. It is divided equally between employee and employer. Businesses cover 6.2% while their workers pick up the other half, usually through paycheck deductions. Unfortunately, self-employed professionals are responsible for paying the entire 12.4%.
Pre-tax retirement plans like 401Ks do not reduce the amount required to pay into social security. Current workers support the beneficiaries who have paid into the system in the past and current workers will eventually receive funds that future workers will contribute to. Someone who earns $50,000 yearly pays $3,100 in Social Security Taxes. His or her employer pays another $3,100.
A self-employed worker making the same yearly amount would pay a total of $6,200, which equals the entire 12.4% that Social Security requires. Luckily part of that amount can be deducted on the tax return to ease the burden of having to lose such a large portion of the income.
A Cap on Social Security Taxes: What Is it?
The majority of American households pay more in social security tax than they do in federal income taxes. Because most workers do not make more than $127,000, they pay the full 6.2% Social Security Tax on all their earnings.
Social Security's Old-Age, Survivors, and Disability Insurance program annually determines a limit for the wages that are subject to a Social Security tax. The limit in 2017 is $127,200, which means any income over that amount is exempt from the 6.2% Social Security Tax. Any employee that makes $127,200 or more will pay the same amount into Social Security, $7,886.40, under the current law.
In 2015, the cap was set at $118,500, which means that some workers will pay an additional $539.40 in taxes this fiscal year. Self-employed workers who make more than $118,500 will owe an additional $1078.80 in 2017.
What Is an Additional Medicare Tax?
In addition to Social Security Taxes, Medicare Taxes also come out of paychecks. Beginning in 2013, people in a certain income bracket contribute an additional 0.9% in Medicare taxes. The employee's filing status determines if he or she will owe the additional fee or not.
What if My Income Exceeds $127,200 With Self-Employed and Employed Wages?
Individuals who work independently and for an employer must first pay the Social Security Tax on the income generated from their job as an employee. Then if the annual income cap is not reached, the worker will have to pay the increased Social Security contribution on the self-employed income until the cap is reached. Therefore if a professional earned $120,000 with an employer and made an additional $25,000 independently, that worker would only have to pay additional Social Security Taxes on $7,200 worth of income.
What Do I Need to Know About Social Security Benefits When I Retire?
Unfortunately, most Americans start planning for retirement late in the game. Luckily, there are a few Social Security secrets that could tremendously increase retirement income as much as $16,122 annually. Learning to maximize Social Security benefits could change the whole dynamics of the retirement years.
If you need help with Social Security tax law, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.