What Is the Social Security Tax Rate?

It seems like the Social Security tax rate, and Social Security in general, are constant hot button issues all over the nation. On the one hand, you have people insisting that it's time to completely overhaul the system and, on the other, people are claiming that messing with it is tantamount to stealing retirement benefits. It's probably the case that somewhere in the middle is the reality of the situation. People are often confused by how Social Security works, and have no idea what the Social Security tax rate is.

The first, and most important thing, to remember about Social Security taxes is that you're not paying into your own account. Everyone pays into a big national Social Security pool that is used to keep the program running and pay those who are currently receiving benefits. The government sets a cap every year on the amount of income that's subject to taxation, which means that you may not pay taxes on your entire income.

In 2017, this cap was $127,200 per year. This means that those earning more than this only pay taxes on the first $127,200 of their earnings. The tax rate is 12.4 percent, half of which is paid by the employee and half by the employer. This cap is also up from 2016's $118,500, meaning that about 12 million workers are paying more in Social Security taxes in 2017 than they did in 2016. 

Self-Employment and Social SecurityTaxes

Those who are self-employed don't benefit from the employer-half of taxes. They are responsible for paying the entire 12.4 percent. This is the case due to SECA, the Self-Employment Contributions Act. However, those who fall under this act can take half of this contribution as a tax deduction on their annual return. 

What Is Social Security Used For?

The taxes collected on behalf of Social Security are used to pay for a broad range of vital services. These include old age benefits, survivor's benefits, and SSDI, or Social Security disability insurance. Overall, these packaged benefits are called OASDI (Old-Age, Survivors, and Disability Insurance).

How the Taxable Amount is Calculated

The tax rates for Social Security are set by law and are calculated partially based on the National Average Wage Index. Because the taxable earnings are capped, some people can overpay their taxes. This often happens when employees work more than one job, and their total earnings put them over the maximum for contributions. These overpayments will be refunded when you file your annual tax return.

Is the System Flawed?

Currently, the Social Security tax system strongly favors the wealthy and, some say, penalizes the poor, since those workers who pay $127,000 per year pay an identical amount in Social Security tax as those who earn millions of dollars annually. For this reason, many lawmakers have been lobbying to raise or even remove the income tax, which they claim will both make the system fairer and also greatly bolster the dwindling reserves. 

Right now, Social Security is underfunded by about $11 trillion, and by 2034, benefits will likely be cut. Unfortunately, the wealthier Americans who stand to be affected by raising or removing the cap also tend to be those with the most political clout to fight against it. 

The Burden on Self-Employed

Raising the cap doesn't just affect the wealthy, however; it can also create a major burden for business owners and the self-employed, as these must cover both the employee and employer portions of the taxes on a quarterly basis. 

In addition, the self-employment tax also comprises Medicare, with the total self-employment tax rate being 15.3 percent, including the 2.9 percent tax for Medicare.

Adjusting Systems

The earnings limit does tend to increase over time, which requires employers to adjust payroll systems every year to account for the new wage base. They also need to notify any employees that are affected that they will see greater withholdings as a result. According to the Foundation for Economic Education, the real burden isn't based on who is responsible for paying tax, but on the elastic nature of supply and demand. 

These adjustments also directly affect employers, who have to pay more in real dollars based on their half of the increasing wage cap. They also must deal with pushback from those employees who suddenly face greater withholdings every pay, resulting in less take-home pay. Consider that sometimes the wage base for taxation may rise while actual salary may not increase. However, the only years the taxable base can increase are those which recipients of SSI get cost of living increases. 

FICA Taxes

Together, Social Security and Medicare taxes are called the FICA, or Federal Insurance Contributions Act, tax. These tax rates are set by federal statutes, which means that new tax laws have to be passed for them to be changed. For both employees and employers alike, the Medicare portion of this tax is 1.45 percent of earnings, which brings the total FICA tax for each to be 7.65 percent. The 6.2 percent of this based on Social Security portion is limited by the taxable cap, while the Medicare part isn't.

There is also a minimum threshold for these taxes. In 2017, if you earn less than $2,000, you won't have to pay Social Security or Medicare, and the threshold for Social Security and Medicare coverage is $18,000 per year. In addition, the ACA adds an additional 0.9 percent tax on amounts over $250,000 for married couples, $125,00 for married couples filing independently, and $200,000 for all other taxpayers, including singles. This extra withholding applies to all wages, compensation, and income from self-employment every calendar year.

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