The Social Security tax rate in the United States is currently 12.4%. However, you only pay half of this amount, or 6.2%, out of your paycheck -- the other half is paid by your employer. And, Social Security taxes are only applied to the first $118,500 in wages for the 2015 tax year, which can make the effective Social Security tax rate less for higher-income individuals.
For a basic example, consider the case of a worker who earns a salary of $50,000 per year. Since this is below the wage limit, the 6.2% Social Security tax rate would apply to the entire income -- so this person would pay $3,100 in Social Security taxes throughout the course of the year. Assuming a bi-weekly pay schedule, this amount translates to about $119 per paycheck.
Or, consider a higher-income individual who's salary is $250,000. Because this is over the wage cap, only the first $118,500 of this person's earnings is subject to the 6.2% tax. So, $7,347 of this worker's income is paid as Social Security tax, making the effective Social Security tax rate just 2.9%.
If you are self-employed, you are responsible for paying both the employer's and employee's portion of the Social Security tax (as well as both parts of the Medicare tax) -- also known as the "self-employment tax." The combined rate is 12.4% (15.3% including Medicare), and the same $118,500 wage cap applies for the Social Security tax. Medicare tax is paid on all wages.
There is some good news. The employer's portion of both taxes is deductible on your Federal income tax return, which can help to offset the sting of paying both parts of the Social Security and Medicare taxes.
Consider an example of a small business owner with $100,000 in calculated self-employment income this year. Since this is under the wage cap, the 12.4% Social Security tax rate is applied, and $12,400 in Social Security tax is due. Half of this amount, or $6,200, plus another $1,450 in Medicare taxes can be deducted when calculating the adjusted gross income.
A key fact to remember
Social Security is similar to many 401(k) plans in that your employer matches your contributions dollar-for-dollar. In other words, even though 6.2% of your paycheck gets taken, that's only half of the amount that is contributed to the Social Security program on your behalf. Even though Social Security tax seems like an inconvenience during your working life, you'll be glad it's there when you retire.
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