Social Security tax, also known as the Old Age, Survivors, and Disability Insurance (OASDI) tax, is important because it helps pay for benefits given to retirees and people who can’t work due to disability. In this guide, we’ll explain how this tax is calculated, who pays it, and other key details you need to know.
Basics of Social Security Tax
Social Security tax is taken out of employees’ paychecks, and for those who are self-employed, it’s included in their quarterly tax payments. For employees, both you and your employer each pay 6.2% of your earnings. If you’re self-employed, you pay the full 12.4% because you’re considered both the employer and the employee.
Key Points:
- Employees and Employers: Each pays 6.2%, making a total of 12.4%.
- Self-Employed: Pay the full 12.4%.
- Tax Cap: The maximum income that can be taxed for Social Security in 2024 is $168,600.
How Social Security Tax Works
Social Security tax, along with Medicare, is funded through Federal Insurance Contributions Act (FICA) taxes. On your pay stub, the Social Security portion is listed as OASDI. This tax pays for benefits given to retirees and disabled individuals. You become eligible for these benefits after working and paying into Social Security for at least 10 years. The amount of benefits you receive is based on how much you earned during your working years.
What Wages Are Taxed?
For 2024, the maximum income that can be taxed for Social Security is $168,600. This means the most an employee can pay in Social Security tax in a year is $10,453.20. This cap changes every year to keep up with inflation.
Income that is taxed includes:
- Salaries
- Bonuses
- Commissions
- Paid vacation or sick time
- Contributions to retirement plans (like 401(k) plans)
Income that is not taxed includes:
- Employer-paid accident or health insurance premiums
- Employer contributions to Health Savings Accounts (HSAs)
For example, if you make $30,000 a year and contribute $4,000 to a 401(k) plan, your taxable income for Social Security remains $30,000.
What If You Overpay Social Security Tax?
If you work more than one job and your total income is more than the taxable cap, you might pay too much Social Security tax. Any extra amount you pay will be credited toward your federal tax bill or refunded to you. Employers, however, do not get refunds for their matching contributions.
How to Calculate Your Social Security Taxes
If you make $165,240 per year, which is about $13,770 per month, you’ll pay $853.74 in Social Security taxes each month, because this income is below the $168,600 cap. If you’re self-employed and earn the same amount, you’ll pay double, which totals $1,707.48 per month.
A Quick History of Social Security Tax
The Social Security tax started in 1935. The initial tax rate was 1% in 1937, and it has gradually increased over the years to 6.2% in 1990, where it remains today, except for brief reductions in 2011 and 2012.
Changes in the Tax Cap
Since 1937, the tax cap has been adjusted to keep up with inflation and wage growth. It started at $3,000 and has increased significantly to the current $168,600.
Concerns About Social Security’s Future
Some experts worry that Social Security might run out of money in the future due to changes in the population. To prevent this, some suggest increasing the Social Security tax rate. However, these suggestions often face resistance from both the public and politicians.
Is Social Security Tax Fair?
Some people think Social Security tax is regressive because it only applies to income up to the cap. This means that higher earners pay a smaller percentage of their total income compared to lower earners.
Are Social Security Benefits Taxed?
Depending on how much income you have, some of your Social Security benefits might be taxed:
- Single Filers: Income below $25,000 is tax-free; $25,000-$34,000 is 50% taxable; over $34,000 is 85% taxable.
- Married, Filing Jointly: Income below $32,000 is tax-free; $32,000-$44,000 is 50% taxable; over $44,000 is 85% taxable.
Understanding how Social Security tax works is important for both employees and self-employed individuals. It’s crucial to know how much you need to pay, how it’s calculated, and how it affects your overall taxes. By staying informed, you can make sure you’re meeting your tax responsibilities correctly and plan your finances better.
What is the Social Security tax rate for employees?
Employees pay 6.2% of their earnings, with their employer matching this amount.
How much do self-employed people pay in Social Security tax?
Self-employed individuals pay the full 12.4% since they are both the employer and employee.
What is the maximum income subject to Social Security tax in 2024?
The maximum income subject to Social Security tax in 2024 is $168,600.
Can I get a refund if I overpay Social Security tax?
Yes, if you work multiple jobs and your earnings exceed the cap, any overpayment is credited to your federal tax bill or refunded.
Are Social Security benefits taxable?
Yes, depending on your total income, a portion of your Social Security benefits may be subject to federal income tax.