What Is the Social Security Tax?

Social Security tax is a payroll tax that helps fund retirement, disability and survivor benefits for eligible Americans. Most employees split the tax with their employers, while self-employed workers generally cover both portions themselves. The tax applies only to certain types of earnings and up to an annual wage limit, with a small number of exemptions available in specific situations.

A financial advisor can help you optimize your financial plan for your tax planning needs.

What Is the Social Security Tax?

The Social Security tax is a federal payroll tax that helps fund retirement, disability and survivor benefits through the Social Security program. Most employees pay the tax automatically through payroll withholding, while employers contribute an equal amount on their behalf.

For employees, the Social Security portion of the Federal Insurance Contributions Act (FICA) tax is generally 6.2% of wages, and employers typically pay another 6.2%. The tax applies only to earnings up to an annual wage base set by the federal government, which means income above that limit is generally not subject to additional Social Security tax.

Self-employed workers generally pay both the employee and employer portions through the self-employment tax, effectively making them responsible for the full Social Security contribution. However, part of the employer-equivalent portion may generally be deductible when calculating adjusted gross income.

Not all types of income are subject to Social Security tax. Wages and net self-employment earnings are usually covered, while investment income such as capital gains, interest and dividends generally is not. Certain workers and specific employment arrangements may also be exempt under federal rules.

The taxes collected help finance benefits paid to current Social Security recipients rather than being placed into an individual account for each worker. A person’s eventual benefit is instead based largely on their earnings history and the age at which they begin claiming benefits.

How Much Is the Tax?

As noted earlier, the Social Security tax is usually 12.4% of your income. In general, your employer pays 6.2% and you pay the other 6.2%. An exception would be if you’re self-employed, in which case you are responsible for the entire 12.4% minus an above-the-line deduction that amounts to 6.2%. You can refer to the below table to see the tax amount for a range of salaries.

You’ll notice that Social Security taxes on the last two salaries are the same amount, and neither is a full 6.2%. That’s because there is a cap on how much Social Security tax you have to pay. The IRS will only levy the tax on $147,000 ($160,200 in 2023) of your income. This means you won’t have to pay more than $9,114.

Because of this cap, workers with salaries higher than $147,000 will pay a lower effective percentage of their salary. For instance, a worker with a $200,000 salary will only be paying 4.56% of his or her salary.

Why Do You Pay Social Security Tax?

Workers have to pay the Social Security tax for the same reason we have to pay any sort of tax: to support government programs in our society. Social Security benefit payments are, in essence, money that we receive from the government. Since more than 60 million people are currently receiving benefits, that’s a lot of money the government has to spend. To foot the bill, the government can do two things: create the money or collect it through taxes.

Printing enough money every month to pay all Social Security benefits is effectively impossible. Inflation would skyrocket to catastrophic levels in no time at all. Therefore, collecting the money through taxation is really the only option.

In broad strokes, the idea of the Social Security tax is a reasonable one. Even though you have to cough up part of your paycheck now, you will eventually get that money back when you’re on the receiving end of the system. Things are a bit more complicated when we depart from the general assessment, but the overarching theory makes sense.

Are There Ways to Avoid Social Security Tax?

Most workers cannot simply opt out of paying Social Security tax. If you earn wages from covered employment or have net earnings from self-employment, Social Security taxes generally apply even if you are already receiving benefits or have reached full retirement age.

There are, however, limited exemptions established by federal law. Certain members of recognized religious groups may qualify if they meet specific requirements and formally waive their rights to Social Security benefits. Some nonresident aliens working in the U.S. under qualifying visa categories, including certain F-1, J-1 and M-1 students, may also be exempt from Social Security and Medicare taxes on eligible employment.

Students who work for the school, college or university they attend may qualify for a separate student FICA exemption when their employment meets federal requirements. In addition, certain workers may avoid paying into the U.S. Social Security system under international totalization agreements designed to prevent workers from being taxed by two countries’ social insurance systems on the same earnings.

Some state and local government employees may also work in positions that are not covered by Social Security, typically because they participate in a qualifying public retirement system instead. However, the rules are narrow and depend on the worker’s employment arrangement.

For most people, therefore, there is no legal strategy for simply choosing not to pay Social Security tax on covered earnings. The key is determining whether a specific statutory exemption applies to your employment, immigration status or religious circumstances before assuming that wages are exempt.

Bottom Line

The Social Security tax is a federal payroll tax that helps fund retirement, disability and survivor benefits for eligible workers and their families. Most employees and self-employed workers are required to pay it on covered earnings up to the annual wage base, although limited exemptions may apply in specific situations. Understanding how the tax works can help you better evaluate your paycheck, self-employment taxes and long-term retirement planning.

Tips for Saving for Retirement

• If you’re feeling overwhelmed by the age and eligibility requirements for Social Security benefits, our Social Security calculator may help. After you fill in your info, we’ll tell you what you can expect in annual benefits once you retire.
• In any retirement conversation, it’s important to be mindful of the retirement tax laws in the state you live in. Taking your state’s laws into account can make a significant difference as you plan for retirement.
• If you already have some money to spare, you could grow it with the help of a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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