What Is Social Security Tax?

The Social Security tax is a tax that every worker must pay in order to keep the program functional and to pay current Social Security beneficiaries.

The amount of Social Security taxes you will pay is based on your income, and depending on how much you currently earn, it's possible you will not be taxed on your whole income. The taxable income limit for workers in 2016 was $118,500. In 2017, this limit increased by nearly $10,000 and is now $127,200.

For workers that are not self-employed, the maximum amount that they will pay in Social Security taxes is $7886.40. This is because employees are only required to pay half of the 12.4 percent Social Security tax rate. Employers are required to cover the other half.

Out of the 173 million workers required to pay Social Security taxes, 12 million were affected by a recent wage base increase instituted by the Social Security Administration (SSA).

If you are self-employed, then you will need to pay the entire 12.4 percent tax rate yourself. Fortunately, half of your Social Security taxes can be deducted from your tax return.

Generally, Social Security tax is collected through either a self-employment or payroll tax. Social Security taxes cover a wide range of benefits, including disability, retirement, and survivorship. Millions of Americans receive Social Security payments every year. This tax is also commonly referred to as OASDI (Old Age, Survivors, and Disability Insurance).

A Flawed System?

Many people believe that Social Security taxes are deeply flawed and levied unfairly. For example, because taxable income is capped at $127,200, the current tax system greatly favors the wealthy; a person that earns the maximum taxable amount of $127,200 will pay the exact same Social Security taxes as someone that earns millions of dollars a year.

There have been proposals made by a variety of lawmakers to both increase the taxable income cap and to make the system fairer. Efforts have also been made to generate more revenue for the program so that it will remain viable.

The Social Security program is currently facing a deficit of $11 trillion, which will likely result in cuts to the program beginning in 2034.

While generally supported by lower income Americans, an increase in the taxable income cap will likely face intense resistance from higher-income workers. Additionally, an increase in Social Security taxes has the potential to greatly harm self-employed workers who must pay the full tax amount every quarter.

Breaking Down "Social Security Tax"

Both traditional and self-employed workers will have Social Security taxes taken from their income. Most employees will have these taxes withheld from their paychecks and sent directly to the government. Every type of income an employee receives is subject to Social Security taxes, including bonuses, salaries, and wages.

The Social Security program is defined as a regressive tax scheme. This means that the people that make the least money have a much larger portion of their paycheck withheld than top earners. Nearly everyone is subject to Social Security taxes, even people who are exempt from paying most other forms of federal tax.

The 2017 self-employment tax rate is 15.3 percent, which is paid to both Social Security (12.4 percent) and Medicare (2.9 percent). Only 92.35 percent of net business earnings are subject to the self-employment tax.

There are several groups of individuals that are eligible for Social Security tax exemptions, including:

  • Religious groups whose beliefs prevent them from receiving Social Security benefits, whether due to death, disability, or retirement
  • Those who are not citizens, legal residents, or nonresident aliens of the United States
  • Students who are in the country temporarily
  • People in the U.S. working for a foreign government as a nonresident alien
  • Students who are employed by the university where they are enrolled and who must work as a requirement of enrollment

The Social Security taxable earnings will almost always increase over time.

Employers are required to alter their payroll systems by January 1 each year to accommodate the new Social Security tax limit. Employers are also required to notify their employees the new amount that will be withheld from their paychecks.

When determining compensation budget, employers should consider how the taxes they are required to pay will impact positions in the company. If employers decide to make their employees entirely responsible for the increased tax burden, they should expect resistance.

Top Social Security Tax Jumps Seven Percent for 2017, But Benefits Rise Just 0.3 percent

While no one enjoys paying taxes, almost everyone is glad they did when they need to collect Social Security benefits. Unfortunately, these benefits rarely see increases that match the rise in the Social Security tax rate.

For instance, the SSA announced that there will be a 0.3 percent cost of living adjustment (COLA) in 2017 for the 65 million people that receive Social Security benefits. There was no COLA increase for beneficiaries in 2016.

However, most beneficiaries will not actually receive this COLA increase because of the Medicare Part B premiums that are automatically deducted from senior's Social Security checks. Those enrolled in Medicare Part D will likely see their benefits decrease in 2017 because of increased premiums. Senior citizens that receive Medicaid because of a low income may receive slightly higher payments in 2017.

In addition to a COLA increase, Social Security beneficiaries who are under the age of 66 will be able to earn more money without a reduction in their benefits. Workers between the age of 62 through 65 who receive Social Security will lose $1 of benefits for every $2 after they earn more than $1,410 a month, or $16,920 a year. This represents a 7.6 percent increase from the 2016 thresholds of $1,310 a month and $15,720 per year.

Workers who will turn 66 in 2017 are allowed to earn as much as $3,740 a month before their birthday without putting their benefits at risk. This income limit increased from the 2016 level by 7.2 percent. During 2015 and 2016, workers who earned above this amount would lose $1 in benefits for every $3 earned. After reaching the full retirement age of 66, you can earn as much as you want without being docked benefits.

If you need help with determining Social Security tax, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top five 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.