Paying Social Security tax is a time-honored tradition—since 1937, to be exact. Both employers and employees pay the tax. But when an employee hits the Social Security wage base, it’s game over for withholding and contributing the tax.
Although the Social Security tax rate generally does not change from year to year, the Social Security taxable wage base does.
Read on to learn more about Social Security tax. Learn what the withholding rate is, what the wages fund, and—of course—the wage base.
Your 1-minute overview of Social Security tax
Social Security tax is an employment tax employers withhold from employee wages and contribute a matching portion. Both Social Security and Medicare taxes make up the payroll tax known as FICA.
Here’s a quick recap of employment taxes and who pays what:
- Federal income tax: Employee
- FICA tax: Employee and employer
- Federal unemployment tax: Employer
- State unemployment tax: Employer (plus employee in some states)
- State income tax (if applicable): Employee
- Other state taxes (if applicable): Employee
- Local income tax (if applicable): Employee
The Social Security Act, which is the law that started the program, was signed into law in 1935. Social Security is a social insurance program. The Social Security Administration is the federal agency that administers the program.
Social Security tax rate
The Social Security tax withholding rate is 6.2%. You must withhold 6.2% from each employee’s wages. The Social Security employer contribution is also 6.2%.
Let’s say an employee receives $1,000 each paycheck. You must withhold $62 ($1,000 X 0.062) from their wages and pay an additional $62 for Social Security tax.
Again, both Social Security and Medicare make up FICA tax. Medicare tax is 1.45%. So, FICA tax is 7.65% for the employee portion and 7.65% for the employer portion (6.2% + 1.45%).
What do Social Security wages fund?
Social Security tax funds a number of things, including benefits for:
- Retired workers
- Retired workers’ dependents
- Disabled workers’ dependents
According to the Social Security Administration, retired workers receive an average monthly Social Security benefit of $1,514. Disabled workers receive an average monthly benefit of $1,259.
Social Security taxes also go towards paying for the administration of the program. After paying out benefits and administration costs, there is a surplus. The federal government borrows remaining money from the Social Security fund. The government is responsible for paying interest on the borrowed funds.
Social Security wage base
Now, onto the good stuff. The Social Security withholding limit.
Only withhold and contribute Social Security taxes until an employee earns above the wage base. Stay up-to-date with the annual Social Security wage base because it generally changes each year.
The 2021 Social Security wage base is $142,800. The 2020 Social Security wage base is $137,700.
After an employee earns above the annual wage base, do not withhold money for Social Security taxes. And, don’t contribute anything else.
Not all employees will earn above the withholding limit. If an employee does not meet this wage base, continue withholding and contributing year-round.
The maximum Social Security contribution in 2021 is $8,853.60 ($142,800 X 0.062). In 2020, the contribution limit is $8,537.40 ($137,700 X 0.062).
If you withhold more than $8,853.60 (2021) or $8,537.40 (2020), you surpassed the wage base and must reimburse your employee.
Remember that the amount you withhold for each employee is based on how much they earn.
Do other taxes have a wage base?
Social Security tax is the only federal tax employees pay with a wage base. Although Medicare also makes up FICA tax, it does not have a wage base. Instead, it has an additional tax once an employee earns a certain amount.
Keep in mind that some state taxes, like SUTA tax, and federal unemployment tax also have a wage base.
Social Security wage base history
Do you enjoy history? Take a look at this list of Social Security wage bases since 2000:
|Year||Social Security Wage Base|
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This article has been updated from its original publication date of 05/07/2015.This is not intended as legal advice; for more information, please click here.