Social Security tax is an employer and employee tax. That means you are required to withhold a percentage of each employee’s wages and make a matching contribution. The Social Security tax generally does not change from year to year (with some exceptions). However, you need to know about the Social Security wage base.
The Social Security tax limit changes annually. If you don’t know the current wage base, your Social Security tax withholding could be incorrect. Learn the purpose of Social Security, as well as the rate and wage base.
What do Social Security wages fund?
The Social Security program started in 1935, when the Social Security Act was signed into law. It is a social insurance program.
On signing the Social Security Act into law, President Roosevelt (Franklin) said, “…We have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.” In 2017, the Social Security Administration doled out roughly $955 billion to 62 million Americans.
In 2014, around 166 million people paid Social Security taxes into the system. Here’s a breakdown of what each Social Security contribution goes towards.
Social Security most notably pays monthly benefits to employees who are retired and their families. Tax dollars also go toward a fund that distributes benefits to people who are disabled, as well as their families. And, it goes to widows, widowers, and children of workers who have died.
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 SS funds.
Social Security withholding 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 .062) from their wages and pay an additional $62 for Social Security tax.
If you are self-employed, you must pay a higher percentage to cover both the employer and employee’s contributions. The self-employed Social Security withholding rate is 12.4%.
Let’s say you earn a salary of $100,000. You must pay $12,400 toward Social Security tax ($100,000 X .124).
Social Security isn’t the only payroll tax you need to withhold and contribute. Medicare tax is another payroll tax. Together, Social Security and Medicare taxes make up FICA tax. The total percentage you must withhold from an employee’s wages for FICA tax is 7.65%.
Social Security wage base
You will only withhold and contribute Social Security taxes until an employee receives a certain salary. For 2018, the Social Security contribution limit is $128,400. Keep up-to-date with the annual Social Security wage base because it can change each year.
Here is a list of the Social Security wage bases since the year 2000:
After an employee earns $128,400, do not withhold money for Social Security taxes. And, you don’t contribute anything else. If an employee does not meet this wage base, continue withholding and contributing year-round.
The maximum Social Security contribution is $7,960.80 ($128,400 X .062). This means you will not withhold more than $7,960.80 from any one employee. And, you will not pay more than this amount per employee. If you withhold more than this from an employee’s wages for Social Security tax, you surpassed the wage base and must reimburse your employee.
Remember, the amount you withhold for each employee is based on how much the employee earns.
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This article has been updated from its original publish date of 05/07/2015.
This is not intended as legal advice; for more information, please click here.