If you have earned income, the federal government collects a payroll tax — on top of your income tax — from your paycheck. The payroll tax is comprised of the Social Security tax, Medicare tax and additional Medicare tax for high-income earners — and it represents your Social Security contribution to your benefits payout when you retire.
Keep reading to figure out how to calculate Social Security taxes. The more you pay, the more you can potentially maximize your Social Security benefits for retirement.
Social Security Rates for Employee vs. Self-Employment Income
If you are an employee, your Social Security taxes will be withheld at a rate of 6.2 percent. Your employer also pays 6.2 percent of your paycheck to the government for Social Security taxes — known as the employer contribution — making the effective tax rate 12.4 percent. If you’re self-employed, you don’t have an employer to pay half the Social Security tax; you’re on the hook for the entire 12.4 percent.
The Social Security tax rate doesn’t change depending on your tax filing status because the wage base is fixed regardless of status. You also don’t have to worry about any marginal tax brackets.
Historical Social Security Tax Rates
The Social Security tax rates have remained the same since 1990, except for in 2011 and 2012, when the rate was temporarily reduced to 4.2 percent for employees — but kept at 6.2 percent for the employer share — and 10.2 percent for self-employment income. When the tax was first introduced in 1937, however, it was only 1 percent, and it wasn’t applied to self-employment income until 1951.
At that time, however, the employee rate was 1.5 percent and the self-employment rate was 2.25 percent. It wasn’t until 1984 that the self-employment rate became double the employee rate.
The Social Security tax income limits changed last in 2017, when the amount of maximum taxable earnings rose from $118,500 to $127,200. The 2017 increase was the largest one-year increase since 1983 — this was 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 2018. If history repeats itself — like the 2017 changes to Social Security — there will likely be an increase to the income limits.
How Your Income Affects Your Social Security Tax
The amount of your income that you pay Social Security tax on matters because it helps you accumulate work credits that qualify you for Social Security retirement benefits and Social Security disability benefits — and it enables you to determine how much your benefit will be.
The Social Security tax applies to your wages and your net self-employment income you earned during the tax year. The tax, however, applies only to a limited amount of income each year, which is known as the Social Security wage base. As of 2017, that number is $127,200 — if your earned income exceeds that amount, you won’t pay the Social Security tax on the remainder.
How Multiple Sources of Income Can Be Taxed Differently
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 in 2017; you would pay Social Security taxes on all of your employee income, but you’d pay the self-employment tax only on the first $27,200 of your self-employment income.
Paying Social Security Taxes
If you’re an employee, you can just sit back and collect your paychecks because your employer is responsible for your Social Security tax withholding. If you’re self-employed, however, you must include your self-employment tax liability when you determine your quarterly estimated tax forms.
Next Up: 40 Social Security Tips for 2017
Barri Segal contributed to the reporting for this article.