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Social Security Tax: What It Is And Why It Matters To You

Scott Steinberg5-minute read

Many of us fondly remember the joy of receiving our first paycheck, quickly followed by feelings of dismay over its smaller than expected size. Credit frequently goes to Social Security tax, which is included in the Federal Insurance Contributions Act (FICA) tax, a form of payroll tax that is withheld from our earnings. Taking a closer look at Social Security tax can help you understand the role it plays in funding various government programs such as Medicare and Social Security benefits, and why it’s deducted from your pay by employers.

What Is Social Security Tax?

Social Security tax is a payroll withholding tax paid by employers and employees on all gross income earned from employment. Applicable to earnings such as salaries, hourly wages, bonuses and tips, it’s a combination of a Social Security tax and Medicare tax that the IRS imposes. Under most circumstances, employers will deduct FICA taxes from your paycheck prior to sending it and submit this money to the IRS on your behalf. Although Social Security tax rates can change from year to year, they only apply up to a certain total amount of your earnings.

Currently, FICA taxes add up to 7.65% of your paycheck in total in 2020. These monies are divided, with 6.2% tax going toward paying Social Security (applicable to wages up to $137,000) and 1.45% tax going toward Medicare (with an additional 0.90% applied to any wages above $200,000).

In effect, the Social Security payroll tax helps fund Social Security, also known as the Old Age, Survivors, and Disability Insurance Program (OSADI). Social Security is a program run by the federal government that provides monthly income to American citizens such as retirees and disabled individuals, who receive these funds in the form of a benefit check.

How Does Social Security Tax Work?

Currently, employers and employees each pay 6.2% of the employee’s earnings, or 12.4% total, in Social Security tax. Social Security taxes are withheld from every employee’s paycheck until these taxes are paid in full. That’s why some employees with larger salaries may see bigger paychecks toward the end of the year, after they have paid 6.2% on their earnings up to $137,700 in full, the maximum amount of tax required.

An additional 1.45% of tax is collected from employers and employees on all gross income (with no maximum income limit) to fund the Medicare program.

If you’re employed by an organization, your employer will match what’s taken from your earnings, and, together, these payments will be deposited with the federal government.

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How Does Social Security Tax Work For The Self-Employed?

Note that even self-employed individuals must pay Social Security tax, aptly named the Self-Employed Contributions Act (SECA). The biggest difference is that if you are self-employed, you will pay the combined employee and employer SECA tax (totaling 12.4% on up to 92.35% of net earnings up to the wage limit of $137,700, plus 2.9% Medicare tax). These amounts are paid directly to the IRS. In 2020, the self-employment tax is effectively 15.3% (12.4% Social Security tax plus 2.9% Medicare tax).

FICA Tax: Exemptions Vs. Deductions

There are exemptions to Social Security tax, but no credits or deductions. These exemptions can be claimed by the following groups:

  • Members of religious groups that are opposed to receiving Social Security benefits if they retire, become disabled, or for their surviving spouse

  • Non-resident aliens who are students in the U.S.

  • Non-resident aliens working in the U.S. for a foreign government

  • Students employed by their school, where their employment will continue only if they remain enrolled.

When Will I Be Able To Begin Collecting Social Security Benefits?

If a Social Security taxpayer qualifies for benefits by way of disability or the death of a spouse, they are eligible for benefits to begin immediately. Those who plan to retire at age 62 can also begin receiving partial benefits. However, the age required to qualify for full benefits has increased, depending on your individual year of birth.

 

Birth Year

Full Retirement Age

1943 – 1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960

67

Other Social Security Tax FAQs

Below, you’ll also find answers to several frequently asked questions (FAQs) about Social Security and FICA tax.

Can I Opt Out Of Social Security Tax?

There is no opt-out provision for Social Security tax. The United States federal government system requires all employees to pay into the Social Security program so that it can continue making payments to all citizens who qualify. All who pay monies in Social Security taxes will receive benefits when they qualify, and for as long as they qualify, without exception. 

Can I Save Privately For My Retirement?

Yes, absolutely. You have many options through which you can and should privately save for retirement. For example, the federal government provides a variety of tax-advantaged savings options for individual retirement planning, as do employers, such as 401(k) and Roth 401(k) accounts. Social Security was never intended to replace pensions and retirement plans, but rather designed as a safety net to help prevent seniors who don’t have these financial resources from falling into poverty when they could no longer work.

Are There Income Limits On The Social Security Tax?

Employees’ incomes are subject to Social Security tax up to earnings of $137,700. No Social Security tax is paid on monies that are earned in excess of this amount.

Do My Taxes Go Into An Individual Account?

Employees don’t have an individual account that’s allocated for their Social Security taxes. Rather, monies that are paid toward FICA tax by employers and employees are processed and sent to the IRS via a pay-as-you-go system that pays benefits to retirees, surviving spouses, and disabled individuals. Social Security taxpayers benefit from this system because they cannot dip into and potentially deplete or tap out their individual account if they outlive their funds, causing them to be left with no income at an advanced age.

Summary: Pay Social Security Tax Now, Collect Benefits Later

Social Security tax (also known as FICA tax) is a payroll tax that is withheld to fund Social Security and Medicare programs, which many citizens benefit from. You can expect to see it deducted from your earnings up to a preset amount. Upon reaching a preset age of retirement, you may become eligible to receive Social Security benefits. To research taxes, retirement saving options, and learn more about your personal finances, we encourage to continue browsing the Rocket HQSM Learning Center.

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    Scott Steinberg

    Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. A strategic adviser to four-star generals and a who’s-who of Fortune 500s, he’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD. The CEO of BIZDEV: The Intl. Association for Business Development and Strategic Planning™, his website is www.AKeynoteSpeaker.com.