Social Security Tax Guide

What Is the Social Safety Tax?

Social Safety tax is the tax levied on each employers and staff to fund the Social Safety program within the U.S. Social Safety tax is collected within the type of a payroll tax mandated by the Federal Insurance coverage Contributions Act (FICA) or a self-employment tax mandated by the Self-Employed Contributions Act (SECA).

The Social Safety tax pays for the retirement, incapacity, and survivorship advantages that tens of millions of People obtain annually beneath the Outdated-Age, Survivors, and Incapacity Insurance coverage (OASDI) Program—the official title for Social Safety.

How the Social Safety Tax Works

The Social Safety tax is utilized to earnings earned by staff and self-employed taxpayers. Employers normally withhold this tax from staff’ paychecks and ahead it to the federal government. The funds collected from staff for Social Safety should not put right into a belief for the person worker at the moment paying into the fund, however slightly are used to pay current older folks in a “pay-as-you-go” system.

Social Safety tax can also be collected to assist people who’re entitled to survivorship advantages—advantages paid to a surviving partner upon the dying of a partner or to a dependent little one upon the dying of a mum or dad.

As of 2022, the Social Safety tax charge is 12.4%. Half of the tax, or 6.2%, is paid by the employer, and the worker is chargeable for paying the opposite half. The Social Safety tax charge is assessed on all sorts of earnings earned by an worker, together with salaries, wages, and bonuses.

Nevertheless, there may be an earnings restrict to which the tax charge is utilized. For 2022, the Social Safety tax is taken from earnings as much as an annual restrict of $147,000; any quantity earned above that isn’t topic to Social Safety tax. The restrict for 2023 is $160,200.

Social Safety Tax for the Self-Employed

Social Safety tax can also be taken from the earnings of the self-employed. Because the Inner Income Service (IRS) considers a self-employed particular person to be each an employer and an worker, they must pay the complete 12.4% Social Safety tax.

The Social Safety tax is utilized to all internet earnings as much as the wage restrict. The self-employment tax is made up of the Social Safety tax and the Medicare tax. As of 2022, the self-employment tax is 15.3% (12.4% Social Safety tax + 2.9% Medicare tax). The self-employment tax is just utilized to 92.35% of internet enterprise earnings.

This is an instance: Ike, who runs a human assets consulting enterprise, calculates his complete internet earnings for the yr to be $200,000 after enterprise bills have been deducted. His self-employment tax charge will probably be assessed on 92.35% x $200,000 = $184,700. Since this quantity is above the capped restrict, his tax invoice will probably be 15.3% x $147,000 (restrict) = $22,491.

Ike can declare an above-the-line deduction for half of his self-employment tax, or $22,491÷ 2 = $11,245.5. In impact, he will get a partial refund on the employer portion (6.2% Social Safety + 1.45% Medicare = 7.65%) of his self-employment tax.

Exemptions

Not each taxpayer has to pay Social Safety tax. Exemptions can be found to particular teams of people, together with:

• Members of a spiritual group who’re against receiving Social Safety advantages throughout retirement, if disabled, or after dying
• Nonresident aliens—that’s, people who’re neither residents nor authorized residents of the USA, who’re within the nation briefly as college students
• Nonresident aliens working within the U.S. for a international authorities
• College students who’re employed on the identical college the place they’re enrolled, and the place employment is contingent upon continued enrollment

Instance of Social Safety Taxes

The Social Safety tax is a regressive tax, that means {that a} bigger portion of lower-income earners’ complete earnings is withheld, in contrast with that of higher-income earners. Take into account two staff, Izzy and Jacob. Izzy earns $85,000 for the tax yr 2022 and has a 6.2% Social Safety tax withheld from his pay. The federal authorities, in impact, collects 6.2% x $85,000 = $5,270 from Izzy to assist pay for retirement and incapacity advantages.

Jacob, then again, earns $175,000 for the tax yr 2022. The Social Safety tax charge will solely be utilized as much as the restrict of $147,000.

Subsequently, Jacob can pay 6.2% x $147,000 = $9,114 as his contribution to the nation’s Social Safety account for older folks and other people with disabilities, however his efficient Social Safety tax charge is $9,114 ÷ $175,000 = 5.2%. Izzy, with a decrease earnings every year, is successfully taxed at 6.2% (i.e., $5,270 ÷ $85,000).