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Part of the Series Social Security Tax GuidePaying Social Security Payroll Tax While You Work
CURRENT ARTICLEWhich Social Security Benefits Are Taxable
The Future of Social Security
The Social Security program, established in 1935, provides monthly financial benefits to workers when they reach retirement age, as well as to survivors of deceased workers (e.g., a spouse or child), and disabled workers.
The Social Security tax is the tax levied on employers and employees to fund the Social Security program in the U.S. The revenue is collected in the form of a payroll tax and a self-employment tax.
The Social Security tax is mandated by the Federal Insurance Contributions Act (FICA). It pays for the benefits that Americans receive under the Old-Age, Survivors, and Disability Insurance (OASDI) program—the official name for Social Security.
The Social Security tax is applied to income earned by employees and self-employed taxpayers. Employers usually withhold this tax from employees’ paychecks and forward it to the government.
The funds collected for Social Security are not put into a trust for the individual employee currently paying into the fund, but are rather used to pay existing older people in a "pay-as-you-go" system.
The Social Security tax is also collected to support individuals who are entitled to survivorship benefits—benefits paid to a surviving spouse upon the death of their spouse or to a dependent child upon the death of their parent(s).
As of 2024, the Social Security tax rate is 12.4%. Half of the tax, or 6.2%, is paid by the employer, and the other 6.2% is paid by the employee.
The Social Security tax rate is assessed on all types of income earned by an employee, including bonuses.
However, there is an income limit above which the tax cannot be applied. The limit for 2024 is $168,600. For 2023, it's $160,200.
The self-employment tax (which, for self-employed people, includes the Social Security tax) is mandated by the Self-Employed Contributions Act (SECA).
It's applied to the net earnings of the self-employed, up to an income limit: $168,600 in 2024, and $160,200 in 2023. Since the Internal Revenue Service (IRS) considers a self-employed individual to be both an employer and an employee, they have to pay the full 12.4% Social Security tax on their own.
The self-employment tax is made up of the Social Security tax and the Medicare tax. As of 2024, the self-employment tax is 15.3% (12.4% Social Security tax + 2.9% Medicare tax). The tax is applied to 92.35% of net business earnings.
Chen, who runs a human resources consulting business, calculates his total net income for 2024 to be $200,000 after business expenses have been deducted. His self-employment tax rate will be assessed on 92.35% of $200,000, or $184,700 (.9235 x $200,000).
However, since this amount is above the $168,600 income limit, his tax bill actually will be 15.3% of $168,600, or $25,795.80 (.153 x $168,600).
Chen can claim an above-the-line deduction for half of his self-employment tax, or $12,897.90 ($25,795.80 ÷ 2). In effect, he gets a partial refund on the 7.65% employer portion of his self-employment tax (6.2% Social Security + 1.45% Medicare) .
The U.S. Social Security program provides Americans with some financial protection from earnings lost due to retirement, death, or disability. Retired workers, their families, and survivors of deceased workers receive monthly benefits payments. Social Security is funded mainly by the taxes that employees, their employers, and self-employed individuals pay throughout their working years.
Not every taxpayer has to pay the Social Security tax. Exemptions are available to specific groups of individuals, including:
The Social Security tax is a regressive tax, meaning that a larger portion of lower-income earners' total income is withheld, compared with that of higher-income earners.
Consider two employees, Aleksandr and Diego. Aleksandr earns $85,000 for the tax year 2024 and has the 6.2% Social Security tax withheld from his pay. The federal government collects $5,270 (.062 x $85,000) from Aleksandr to help pay for retirement, survivorship, and disability benefits.
Diego, on the other hand, earns $175,000 for the tax year 2024. The Social Security tax rate will only be applied up to the limit of $168,600.
Therefore, Diego will pay $10,453.20 (.062 x $168,600) as his contribution to the country’s Social Security program for older people, survivors, and people with disabilities. But his effective Social Security tax rate is 6.0% ($10,453.20 ÷ $175,000). Diego, with a lower income, is taxed at the higher 6.2% rate ($5,270 ÷ $85,000).
The Social Security tax is the revenue collected by the U.S. government to finance the Social Security program. The tax is automatically collected via employee payroll, and both employers and employees fund the program. Self-employed people pay it via the self-employment tax as both employees and employers along with Medicare. They pay it when they file their taxes.
In 2024, the income limit for Social Security tax is $168,600 (for 2023, it's $160,200). That means employees will not have to pay tax on any amount they earn above $168,600.
If you earn in retirement between $25,000 and $34,000 and file as an individual, you may have to pay up to 50% in taxes on your Social Security benefits. If you earn more than $34,000, you may have to pay up to 85%. To minimize the tax, you can earn less, move income-generating assets into an individual retirement account (IRA), minimize withdrawals from retirement plans, or donate your required minimum distributions (RMDs).
Social Security is always taxable, regardless of age. Your income in any given year determines whether or not your Social Security benefits are taxed.
The Social Security tax (at a rate of 12.4% as of 2024) is applied to the earned income of Americans throughout their working years. The revenue derived from the Social Security tax funds the Old-Age, Survivors, and Disability Insurance (OASDI) program, which is commonly known as Social Security.
Paying Social Security Payroll Tax While You Work
CURRENT ARTICLEWhich Social Security Benefits Are Taxable
The Future of Social Security
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Related TermsA Social Security number (SSN) is a numerical identifier assigned to U.S. citizens and some residents to track their income and determine benefits.
Substantial gainful activity (SGA) marks the salary threshold used by the Social Security Administration to determine eligibility for disability benefits.
Social Security provides benefits to retirees, survivors, and disabled workers. How much you receive depends on your age and income.
Full retirement age is the age at which you can receive full Social Security retirement benefits. Your FRA varies depending on the year in which you were born.
File and suspend was a Social Security claiming strategy that allowed couples of retirement age to receive spousal benefits while delaying retirement credits.
An after-tax contribution is a deposit into a retirement account of money that has been taxed in the year in which it was paid into the account.
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