Legal Definitions - Social Security tax

The Social Security tax is a mandatory payroll tax collected under the Federal Insurance Contributions Act (FICA). Its primary purpose is to fund the Social Security program, which provides retirement, disability, and survivor benefits to eligible individuals and their families.

This tax is levied on an employee's wages up to a certain annual limit, known as the "maximum wage base," which is adjusted each year. The total Social Security tax rate is 12.4% of an employee's gross wages. However, this cost is typically split between the employee and their employer, with each party contributing 6.2%.

Unlike Medicare taxes, which are also part of FICA and apply to all earned income without a limit, Social Security tax only applies to wages up to the maximum wage base. Once an individual's earnings for the year exceed this base, no further Social Security tax is withheld or contributed on additional income.

Here are a few examples to illustrate how Social Security tax works:

• Example 1: Standard Employee Earnings

  Maria works as a marketing specialist and earns $60,000 per year. Since her income is below the annual maximum wage base, Social Security tax applies to her full earnings. Her employer withholds 6.2% of her wages for Social Security, and her employer also contributes an additional 6.2% on her behalf. This means a total of 12.4% of her $60,000 wages ($7,440) is paid into Social Security, split evenly between Maria and her employer.

• Example 2: High-Income Earner

  David is a senior executive earning $200,000 annually. Let's assume the maximum wage base for the year is $168,600. Social Security tax will only be applied to the first $168,600 of his earnings. Once David's year-to-date wages reach this amount, neither he nor his employer will pay any more Social Security tax for the remainder of the year, even though he continues to earn more. This illustrates the annual cap on taxable earnings for Social Security.

• Example 3: Self-Employed Individual

  Sarah operates her own graphic design business as a sole proprietor. As a self-employed individual, she is responsible for paying both the employee and employer portions of the Social Security tax, which totals the full 12.4% of her net earnings from self-employment, up to the annual maximum wage base. This combined payment is often referred to as "self-employment tax." If Sarah's business earns $80,000 in profit, she would pay 12.4% of that amount (or a slightly adjusted figure for self-employment tax calculation) towards Social Security, as she is both the "employer" and the "employee."