The Social Security tax in the United States works differently than federal income taxes. Instead of using a system of tax brackets that require higher earners to pay more, Social Security tax is assessed at a flat rate on up to a maximum amount of income.
Here's a rundown of how the Social Security portion of the payroll tax works in 2018, and how you can calculate how much you'll pay.
The payroll tax
The Social Security tax, which is officially referred to as OASDI (Old Age, Survivors, and Disability Insurance) tax, is one of the two components of the payroll tax in the United States. The payroll tax rate is currently 7.65% and is assessed on both employers and employees. In other words, the payroll tax rate assessed on American workers is technically 15.3%, but you're only responsible for covering half of it. Of the 7.65%, 1.45% goes to Medicare hospital insurance taxes and the other 6.2% goes to Social Security.
The Social Security tax rate in the United States is 6.2%. And if you're curious, this can be further broken down into 5.015% for retirement and survivors benefits and 1.185% for Social Security disability.
However, Social Security is only assessed on earned income, such as salaries, bonuses, wages, tips, and income from a business you're actively running. Passive-income sources, such as dividends, rental income, and income from a business you own but don't participate in, are not subject to Social Security tax.
The 2018 Social Security taxable earnings cap
Not only is Social Security tax only charged on earned income, but it only is assessed on a maximum amount of earned income. This maximum amount, known as the Social Security tax "earnings cap," is adjusted annually to keep up with inflation. For 2018, the earnings cap is $128,400.
In other words, if your earned income is less than this amount, you'll pay the 6.2% Social Security tax rate on all of it. If your earned income is higher than this threshold, you'll only pay this tax on the first $128,400, no matter how much you earn. Effectively, this makes the maximum Social Security tax any employee will pay $7,960.80 in 2018.
Finally, it's worth mentioning that the $128,400 taxable earnings cap applies only to the Social Security portion of the payroll tax. Medicare tax is assessed on all earned income -- in fact, high earners pay an additional 0.9% Medicare tax on earned income above a certain threshold.
Self-employed individuals pay both parts of the tax
If you're self-employed or get part of your earned income from self-employment sources, the calculation gets a bit more complicated. Specifically, self-employed individuals are considered to be both the employee and the employer and therefore are responsible for paying both sides of the payroll tax. So you'll pay:
- 15.3% on self-employment income, up to $128,400
- 2.9% for Medicare tax on self-employment income above $128,700
Collectively, this is known as the self-employment tax.
If you're self-employed, you'll pay this tax on your net self-employment income. I'll spare you the mathematical explanation, but this simply is your total self-employment profit multiplied by 0.9235.
As an example, let's say that you own and operate your own business and that your 2018 self-employment income is $100,000. This means that your "net self-employment income" is $92,350. Since this is less than the earnings cap, the 15.3% self-employment tax rate will be assessed on the entire amount, which translates to $14,129.55. Of this amount, $11,451.40 will be Social Security tax.
Calculating your Social Security tax in 2018
If you're an employee, the Social Security tax calculation is easy. If you earn less than $128,400 in 2018, simply multiply your earnings by 0.062 to find your Social Security tax. For example, if your salary is $50,000, your 2018 Social Security tax will be $3,100. If you earn $128,400 or more, your Social Security tax is $7,960.80, no matter how much you earn.
If you're self-employed, your Social Security tax calculation is a bit more complicated, as I outlined earlier, but you're considered the employer and the employee, so you'll pay more than an employee with the same amount of earned income.