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Understanding Social Security Tax

Understanding Social Security Tax

Understanding Social Security Tax

Social Security is a government-run program that provides financial assistance to individuals in retirement, those with disabilities, and surviving family members of deceased workers. The program is funded through Social Security taxes, which are collected from both employees and employers. In this article, we will explore the basics of Social Security tax, including what it is, how it works, and how it impacts your finances.

What is Social Security Tax?

Social Security tax is a payroll tax that funds the Social Security program. It is collected from both employers and employees, and the funds are used to provide benefits to eligible individuals. The tax is officially called the Federal Insurance Contributions Act (FICA) tax, and it is paid on earned income, such as wages, salaries, and tips.

As of 2021, the Social Security tax rate is 12.4%, with 6.2% paid by employees and 6.2% paid by employers. The tax is assessed on earnings up to a certain limit, which is known as the Social Security wage base. For 2021, the wage base is $142,800, meaning that any earnings above that amount are not subject to Social Security tax.

How Does Social Security Tax Work?

Social Security tax is withheld from an employee’s paycheck, just like federal income tax and other payroll taxes. The employer is responsible for withholding the employee’s share of the tax and remitting it to the government, along with their own share of the tax.

Self-employed individuals are also responsible for paying Social Security tax. However, because they are both the employer and the employee, they must pay both the employer and employee shares of the tax. This is known as the self-employment tax, and it is calculated on the individual’s net earnings from self-employment.

The funds collected through Social Security tax are deposited into the Social Security trust funds. These funds are then used to pay benefits to eligible recipients, including retirees, disabled individuals, and surviving family members of deceased workers.

How Does Social Security Tax Impact Your Finances?

Social Security tax can have a significant impact on your finances, both now and in the future. Here are a few key things to keep in mind:

– Social Security tax reduces your take-home pay: Because Social Security tax is withheld from your paycheck, it means that you have less money to take home. When you are budgeting and planning your finances, it is important to factor in the impact of Social Security tax so that you can make sure you are living within your means.
– Social Security tax impacts your retirement benefits: The amount of Social Security tax you pay throughout your working life will impact the amount of benefits you receive in retirement. Generally speaking, the more you pay in Social Security tax over your career, the higher your Social Security benefits will be when you retire.
– Social Security tax impacts your self-employment income: If you are self-employed, Social Security tax can have a significant impact on your income. You will need to factor in the cost of the self-employment tax when setting your rates and pricing your services, as well as when calculating your estimated tax payments.

What Are Some Recent Changes to Social Security Tax?

Social Security tax rates and wage bases are subject to change over time, based on legislation and economic factors. Here are a few recent changes to Social Security tax:

– In 2021, the Social Security wage base increased from $137,700 to $142,800. This means that any earnings above $142,800 are not subject to Social Security tax.
– In response to the COVID-19 pandemic, the federal government allowed employers to defer the payment of their portion of Social Security tax from March 27, 2020, through December 31, 2020. However, any deferred taxes must be paid back in two installments in 2021 and may impact employer’s fiscal plans.
– If you are nearing retirement age, it is also important to note that the full retirement age, which is the age at which you can receive your full Social Security benefits, is gradually increasing. For individuals born in 1959, the full retirement age is 66 and 10 months; for those born in 1960 or later, the full retirement age will be 67.


Social Security tax is an important aspect of our financial lives, as it impacts our take-home pay, retirement benefits, and self-employment income. By understanding how Social Security tax works and staying up-to-date on changes to tax rates and wage bases, we can make informed decisions about our finances and plan for a secure financial future.

The Social Security tax is formally enacted under United States law through the Federal Insurance Contributions Act, or FICA, a piece of legislation which also extends to the ability to fund Medicare. In this way, government legislators intended for the Social Security tax rate maintained to be placed in accordance with the eventual financial benefits to be administered to the individual taxpayer.

Social Security taxes are thus paid by people to pay for old age, survivor, and disability benefits, and the legal language pertaining to them can be found in United States Code Title 46, Subtitle C, Chapter 21.

The Social Security tax will not come from the specific source of the Federal Insurance Contributions Act in the event of a person who is not a payroll of another individual or of a larger organization, but is instead self-employed. Social Security taxes in such cases will come instead under the heading of the Self-Employment Contributions Act of 1954. The Social Security tax is considered, as a general subject, to be a kind of payroll tax. In this regard, the Center on Budget and Policy Priorities has pointed to the fiscal burden posed by payroll tax obligations as being more substantial than those posed by the equivalent area reserved for taxes paid on income.

The Social Security tax rate does not include under its coverage income generated from investments. Social Security taxes can be ruled as unnecessary in the event that an employee’s employer primarily acts toward him or her as an educator.