How Is Social Security Tax Calculated?

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How Is Social Security Tax Calculated?

The Old-Age, Survivors, and Disability Insurance Program (OASDI) tax, sometimes known as the Social Security tax, is computed by deducting a certain percentage of your earnings from each paycheck. Each year, the Social Security tax rates are set by law and apply to both workers and employers.

The Social Security tax rate for workers and employers is 6.2% of employee pay, for a total of 12.4% in 2021 and 2022. Self-employed individuals must pay the entire 12.4%.

The Federal Insurance Contributions Act refers to the combined taxes withheld for Social Security and Medicare (FICA).Social Security taxes are denoted as OASDI on your pay statement, while Medicare is denoted as Fed Med/EE. Social Security and Medicare are both government programs that offer payments to retirees, disabled persons, and offspring of dead employees.

Key Takeaways

  • The Social Security tax rate is 6.2% of employee pay (for a total of 12.4%) for both workers and employers.
  • Self-employed individuals pay the full 12.4% Social Security tax rate.
  • A tax cap limits the amount of yearly earnings or earned income that may be taxed; in 2021, the maximum amount of income that can be taxed is $142,800; in 2022, the maximum is $147,000.
  • The Social Security tax is regressive, which means it is imposed evenly regardless of income, as opposed to a progressive tax, which is based on income.

Social Security Tax Rates

Social Security supports retirees and people who are otherwise unable to work due to illness or disability. Social Security is sometimes the sole source of continuous income for persons who are unable to work, particularly those with low earnings histories.

Because Social Security is a government program designed to provide a safety net for working individuals, it is financed by a simple withholding tax that deducts a predetermined proportion of pretax income from each paycheck. Workers who have contributed for at least ten years are entitled to obtain benefits depending on their earnings history when they retire or become disabled.

Based on earnings history, Social Security payments are restricted at a maximum monthly benefit amount. To prevent employees from paying more in taxes than they may subsequently get in benefits, a tax cap limits the amount of yearly earnings or earned income that can be taxed.

The highest amount of income subject to the OASDI tax in 2021 is $142,800, with the maximum annual employee contribution set at $8,853.60. The maximum amount of income subject in 2022 is $147,000, with a maximum annual employee contribution of $9,114.00. Congress determines the amount, which might vary from year to year.

The pay cap is yearly adjusted for inflation and is available in IRS Publication 15 for most employees and Publication 51 for agricultural workers. Wages subject to FICA, according to IRS Publication 15, include any income earned for services done, unless explicitly excluded. It is not necessary to pay in cash or by cheque.

Salaries, bonuses, commissions, and paid vacation or sick leave are all examples of wages. Unless the employee is a domestic or agricultural worker, in-kind payments in the form of products, accommodation, food, clothes, or services are also included.

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Contributions to a qualified retirement plan that are made voluntarily are also taxable to FICA. Accident or health insurance premiums paid by an employer for an employee, including the employee’s spouse and dependents, are not wages and therefore not subject to FICA. Employer payments to Health Savings Accounts (HSAs) are likewise not considered wages.

Jeff, for example, makes $20,000 every year. He chooses to put $4,000 to his 401(k) plan, and his company matches 25% of his contribution, or $1,000. His Social Security earnings are $20,000, but his optional deferral contribution is still liable to FICA, while the employer’s extra payment is not. His Social Security tax withheld is $1,240 ($20,000 x 6.2%).

If a person earns more than the Social Security tax threshold from more than one employment, they may end up paying more taxes than necessary. When there is an overpayment, the cash is either added to the individual’s federal tax bill or returned. Employers are still required to match the tax contribution, but they do not get a refund even if they become aware of the overpayment.

History of Social Security Tax Rates

The Social Security tax was implemented in 1937. The employee rate was 1% at the time. It has gradually increased over time, reaching 3% in 1960 and 5% in 1978. With the exception of 2011 and 2012, the employee percentage climbed from 6.06 to 6.2% in 1990 but has been constant thereafter.

For those years, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 decreased the employee payment rate to 4.2%; employers were still obligated to pay the full amount of their contributions.

The tax limit has been in place since the program’s creation in 1937 and stayed at $3,000 until the Social Security Amendments Act of 1950. It was later increased to $3,600 with additional perks and coverage. Additional tax-cap hikes in 1955, 1959, and 1965 were intended to alleviate the disparity in benefits between low-wage and high-wage employees.

In the 1970s, there were many suggested adjustments and re-evaluations to Social Security tax policy. To address benefit levels for persons in various tax bands, the Nixon Administration argued that tax limit hikes needed to match with changes in the national average salary index. Due to difficulties with the benefits formula that prompted funding concerns, the 1972 Social Security Amendments Act had to be rewritten. A 1977 amendment addressed the fiscal imbalance by establishing a tax limit rise system that corresponded to average pay growth.

In addition to maintaining pace with normal pay growth, the Social Security tax threshold has been raised to enhance system funding and ensure fair benefit levels for people earning higher-than-average salaries.

A widespread concern in the twenty-first century is that Social Security may become bankrupt owing to increasing life expectancies and a falling worker-to-retiree ratio. Analysts sometimes propose boosting the Social Security tax in order to maintain the program appropriately financed. However, most politicians are unwilling to support this viewpoint due to widespread popular opposition.

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A Regressive Tax

Another popular issue about the Social Security tax is that it is regressive, which means that if a person earns less money, a larger proportion of their income is taxed. Because it only applies to income up to a particular threshold, it is a regressive tax. Anyone earning less than $142,800 in 2021 will pay an effective Social Security tax rate of 6.2%. In comparison, someone earning $1 million per year contributes a substantially less proportion of their overall income toward the Social Security tax.

Medicare

Another government program that caters for residents in need is Medicare’s Hospital Insurance (HI) program, which involves a required withholding tax.

The HI tax rate, like the OASDI, is fixed by legislation each year. The HI tax rate for workers and employers in 2021 is 1.45%. Self-employed individuals must pay both percentages, for a total tax rate of 2.9%.

Notably, on March 27, 2020, former President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion coronavirus emergency stimulus plan. The measure permitted employers to delay Social Security payroll taxes until December 31, 2020, with 50% of the deferred amount payable by December 31, 2021, and the other half due by December 31, 2022. The legislation also applies to self-employed individuals.

Certain firms will also be able to claim a payroll tax credit for workers who are still being paid but are unable to work due to the crisis.

Calculating FICA Taxes: An Example

Employees earning $165,240 per year get semi-monthly payments of $6,885 before taxes and retirement-plan withholding. While Medicare taxes are required on the total wage, only the first $147,000 is liable to Social Security taxes in 2021. Because $147,000 divided by $6,885 is 21.3, this criterion is met after the 22nd payment.

The total FICA tax withholding for the first 21 pay periods is therefore ($6,885 x 6.2%) + ($6,885 x 1.45%), or $526.70. Because just the Medicare HI tax applies to the next three pay periods, the withholding is decreased to $6,885 x 1.45%, or $99.83. Each year, the employee contributes $8,964.27 to Social Security and $2,395.98 to Medicare. The company must contribute the same amount to both plans, even if it has no effect on the employee’s take-home income.

As previously stated, self-employed individuals are regarded both the employer and the employee for tax reasons, which means they must pay both payments. In the above example, a self-employed individual earning the same wage pays $17,928.54 to Social Security and $4,791.96 to Medicare.

What Is the Social Security Withholding for 2022?

The OASDI tax rate, sometimes known as the Social Security tax, has been 6.2% since 1990. As a result, the Social Security withholding rate in 2022 will be 6.2%.

How Much Social Security Income Is Taxable?

Not all taxpayers must pay federal income taxes on Social Security payments. Individuals who earn a large income in addition to their Social Security payments are usually obligated to pay federal income taxes on their Social Security benefits. If you must pay taxes on your Social Security benefits, you have two options: make quarterly estimated tax payments to the IRS or have federal taxes taken from your benefits.

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Your combined income determines how much of your Social Security income is taxed. Adding your adjusted gross income, nontaxable interest, and one-half of your Social Security payments yields your combined income.

If you file your federal income taxes as a single person with a combined income of $25,000 to $34,000, you may be required to pay income tax on up to 50% of your benefits. If your total income exceeds $34,000, up to 85% of your benefits may be taxed. If your total income is less than $25,000, your Social Security income is tax-free.

If you are married and file a joint tax return, and your combined income is between $32,000 and $44,000, you may be required to pay income tax on up to 50% of your benefits. If your total income exceeds $44,000, up to 85% of your benefits may be taxed. If your total income is less than $32,000, your Social Security income is tax-free.

Finally, if you are married and file a separate tax return, you will very certainly be required to pay taxes on your benefits. If you receive Social Security payments, you will get a Form SSA-1099, Social Security Benefit Statement, every January. This form will reveal the amount of benefits you got in the previous year, and you may use this information to decide if your benefits are taxed when you file your tax return.

Is OASDI the Same As Social Security?

The formal term for Social Security is the federalOASDIprogram. The abbreviation OASDI stands for Old-Age, Survivors, and Disability Insurance.

How Much Is Social Security Taxed at Full Retirement Age?

Even if you work beyond the full retirement age, you must continue pay Social Security contributions based on your earnings. However, if you work beyond the normal retirement age, you may boost your Social Security benefits.

Once you begin receiving Social Security benefits, your income will decide whether you are required to pay income tax on a portion of your Social Security income. Refer to question #2 for further information: What Amount of Social Security Income Is Taxable?

How Much Tax Will Be Withheld From My Social Security Check?

The amount of taxes taken from your Social Security payment is determined by your total income. Refer to question #2 for further information: What Amount of Social Security Income Is Taxable?

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