If you have earned income, the federal government collects a payroll tax — on top of your income tax — from your paycheck. The payroll tax consists of the Social Security tax, Medicare tax and additional Medicare tax for high-income earners. Combined, these taxes represent your contribution to your government benefits payout when you retire.
For 2020, the maximum Social Security tax paid by an employee — not including Medicare taxes — is $8,537.40. Social Security taxes are contributed in equal amounts, with 6.2% of income paid by employees and 6.2% paid by employers. Medicare taxes are an additional 1.45% for both employers and employees, taking the entire Social Security and Medicare tax percentage to 15.30%.
- What Is Social Security Tax?
- What Is the Social Security Tax Limit?
- How Does Income Affect Your Social Security Tax?
- How Has Social Security Tax Changed for 2020?
Social Security tax is mandated under the Federal Insurance Contributions Act, or FICA. It is comprised of old-age, survivors and disability insurance taxes. Old-age benefits are what most people think of as Social Security benefits, which are paid out upon reaching retirement age. Survivors and disability benefits are paid to qualifying individuals only. Hospital insurance taxes, or Medicare taxes, aren’t strictly “Social Security taxes,” but they’re often discussed in concert with Social Security taxes.
The U.S. government imposes a limit on how much income is taxed for Social Security purposes. This figure is known as the Social Security wage base limit, and it’s subject to change annually. For tax year 2020, the Social Security wage base limit is $137,700, up from $132,900 for tax year 2019. If you multiply the 2020 wage base limit of $137,700 by the employee Social Security tax rate of 6.2%, you’ll find the total Social Security tax limit of $8,537.40. Note that the wage base limit only applies to Social Security taxes and not to Medicare taxes.
Here’s a look at how the Social Security wage base has increased from 2010 to 2020:
|Social Security Wage Base From 2010-2020|
|Year||Maximum Taxable Amount||Percentage Increase|
If your income exceeds the Social Security wage base limit you won’t have to pay any additional Social Security taxes for that year. For tax year 2020, this means any income you earn above $137,700 is no longer subject to Social Security taxes. Looking at it another way, as soon as you’ve paid in the maximum of $8,537.40 for tax year 2020, you’re off the hook for further Social Security taxes — even if you earn $1 million or more. Just keep in mind that Medicare taxes have no wage limit, so you’ll continue to pay that additional 1.45% no matter how much you earn.
If you’re self-employed you’ve got a tough pill to swallow when it comes to Social Security and Medicare taxes. Normally, employers split payroll taxes with employees, with each side of the equation responsible for 6.2% in Social Security taxes and 1.45% in Medicare taxes. However, if you’re self-employed, you’re considered both an employer and an employee, making you responsible for the entire 15.3% in taxes yourself.
If you have both employee and self-employment income, the Social Security tax applies to your employee income first. For example, say you have $100,000 of employee income and $40,000 of self-employment income. You would pay Social Security taxes on all of your employee income, but you’d pay the self-employment tax only on the first $37,700 of your self-employment income.
The Social Security tax rates have remained pretty steady since 1990. The exceptions were 2011 and 2012, when the rate was temporarily reduced to 4.2% for employees — but kept at 6.2 % for the employer share — and 10.4% for self-employment income.
When the tax was first introduced in 1937 it was only 1%, and it wasn’t applied to self-employment income until 1951. At that time, the employee rate was 1.5% and the self-employment rate was 2.25%. It wasn’t until 1984 that the self-employment rate became double the employee rate.
The Social Security tax income limits usually change annually, with the average rate of change running a few percentage points per year. In 2017, however, the amount of maximum taxable earnings rose from $118,500 to $127,200. The 2017 increase of 7.34% was the largest single-year gain since 1983, mainly because there was no cost-of-living increase in benefits in 2016, so there was no change in the taxable maximum amounts.
It remains to be seen if the Social Security tax — and the income limits — will rise again in 2021. If history is any indicator, however, you can at least expect an increase to the income limits.
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