What is Social Security tax and how can you determine the correct amount? This comprehensive guide provides everything you need to know about Social Security taxes, such as information on rates, exemptions, and refunds.
In this article:
- What Is Social Security Tax?
- When Did Social Security Taxes Start?
- Who Pays Social Security Taxes?
- Who Is Exempted from Social Security Tax?
- How Is Social Security Tax a Regressive Tax Scheme?
- What Is the Social Security Tax Rate for 2019?
- What Is the Social Security Tax Limit for 2019?
- When Can a Person Stop Paying Social Security Tax?
- Can You Deduct Social Security Tax?
- Is Social Security Tax Refundable?
Answers to Frequently Asked Questions About Social Security Taxes
What Is Social Security Tax?
Social Security tax is a kind of tax the Federal Government collects. It’s important because millions of Americans rely on Social Security for disability, survivorship, and retirement benefits annually.
What Is Social Security Tax Used For?
The Federal Government doesn’t use Social Security taxes collected for a trust fund for actively-paying individuals. Instead, it uses the collected taxes to financially support entitled widows or widowers and retirees.
When Did Social Security Taxes Start?
The United States’ Social Security Act was signed into law by then-President Franklin D. Roosevelt on August 14, 1935. Nearly two years later, in January 1937, the Federal Government began collecting Social Security taxes.
Who Pays Social Security Taxes?
Employees and self-employed income earners are required to pay this kind of tax. Employers normally withhold this tax from the salaries of their employees and remit it to the Federal Government.
Who Is Exempted from Social Security Tax?
Almost everyone must pay Social Security taxes. However there are some exceptions, these include:
- Civilian employees of the Federal Government who are under the Civil Service Retirement System, i.e., those who were on board prior to 1984
- People who belong to a religious group who resist getting Social Security benefits associated with disability, retirement, or death
- Individuals who aren’t legal residents nor citizens of the United States but are temporarily in the country to study
- Students whose employment with the same school they’re studying in is coterminous with their enrollment
- Non-resident aliens working for another country’s government who are currently assigned in the United States
Is Social Security Tax Progressive or Regressive?
There are two kinds of taxes according to applicability:
- Progressive — higher tax rate on higher incomes
- Regressive — applied evenly to all
Social Security tax is regressive because, regardless of the amount earned, the same tax rate of 12.4% applies. Another characteristic of a regressive tax scheme is the tendency to affect lower income earners more than the higher ones.
Here are two registered wage earners, Clarence and Marielle.
- Clarence earned a total of $120,000 in wages for the year.
- Marielle earned a total of $150,000 in wages for the year.
Both Clarence and Marielle will be levied 6.2% in Social Security taxes, which is the employee’s share of the total.
Clarence’s Social Security Tax
Clarence’s Social Security tax share will be $7,440, which is 6.2% of his annual wage.
Marielle’s Social Security Tax
Marielle’s Social Security tax for the year will be $8,239.80, which is only 5.49% of her annual income of $150,000.
Comparing Their Taxes
Between Clarence and Marielle, Clarence (6.2%) paid a bigger chunk of his income in Social Security tax than Marielle (5.49%).
This happened because of the $132,900 annual income limit for computing Social Security tax. Out of Marielle’s $150,000 income for the year, she’ll only pay taxes for $132,900.
Marielle accrued a Social Security tax of $8,239.80, which only comprises 5.49% of the total annual income of $150,000. Clarence earned an income that didn’t exceed the $132,900 limit, which made his entire annual wages Social Security-taxable.
What Is the Social Security Tax Rate for 2019?
As of 2019, the Social Security tax rate is 12.4%, which is split in half between the employer and the employee. Employees pay 6.2% on all income earned, while their employers pay the other another 6.2% out of their own pockets.
The Federal Government considers self-employed individuals as both employer and employee. As such, self-employed individuals pay the full 12.4% Social Security tax.
Unlike employees who pay Social Security tax on their annual adjusted gross income, self-employed individuals pay the tax based on 92.35% of their business’ net income. Net income is the income after deducting a business’ legitimate operating expenses.
What Is the Social Security Tax Limit for 2019?
As of 2019, the annual Social Security tax limit is $132,900. This means that the Federal Government will levy Social Security tax on income that exceeds $132,900.
Take two employees, Mark and Mindy.
- Mark’s annual income from employment totaled $132,900
- Mindy’s annual income totaled $190,000
Comparing Their Taxes
Mark and Mindy will pay the same Social Security tax of $8,239.80. This is because the government only imposes the 6.2% Social Security tax up to a maximum annual income of $132,900.
Mark’s income amounted $132,900 and will pay $8,239.80 in Social Security tax for the year. While Mindy’s income amounted to $150,000, the government can only levy Social Security taxes up to $132,900.
If Mark was a self-employed consultant who earned the same amount, he’ll pay 12.4% in Social Security tax. However, the government will only levy the 12.4% Social Security tax on 92.35% of the $132,900 net income, which amounts to $15,218.91.
When Can a Person Stop Paying Social Security Tax?
Paying Social Security tax is mandatory for as long as a person earns wages, regardless of age. Even after turning 70, a person still has to pay Social Security taxes as long as that person is still a registered wage earner.
What ultimately determines when a person will stop paying Social Security taxes is the filing status and income. Age has no bearing on when paying Social Security taxes will stop.
Can You Deduct Social Security Tax ?
The Federal Government levies Social Security taxes on both employment and self-employment income. Employers withhold employees’ Social Security taxes for remittance to the Federal Government while self-employed individuals pay theirs directly to the government.
The Federal Tax Code treats the deductibility of Social Security taxes differently for employees and self-employed individuals. It prohibits deducting Social Security taxes for employees’ taxable incomes but does so for self-employed individuals.
Is Social Security Tax Refundable?
Generally speaking, there aren’t many situations that will justify a Social Security tax refund, except when employers withhold too much Social Security tax for their employees.
How can this happen considering employers are perfectly aware of the maximum Social Security-taxable income level? This is possible if a person has multiple employers during the year and didn’t disclose it to the employers.
Unless otherwise informed, employers would assume they are the only employer, especially if the employee is working full-time. As such, they’ll consider wages paid as their employees’ only source of income and withhold Social Security taxes accordingly.
But if all of the individual’s employers think of that, they would all be withholding the 6.2% share of the individual, which could throw off their Social Security tax calculator. If the individual’s total annual wages from multiple employers exceed $132,900, the employers may withhold too much for taxes.
How to Report and Refund Excess Social Security Taxes
A person can report excess Social Security taxes for refund in Form 1040. A person can refund excess Social Security taxes in the form of tax credits or refunds.
The Federal Government may allow an individual to deduct the excess withheld taxes from his taxes due. If the person is claiming for a tax refund, you can include the excess tax in the refund.
Eventually, most American workers will start collecting Social Security benefits. Those who understand what Social Security taxes are and how they work can put themselves in a position to maximize their Social Security benefits in the future.
Which do you think is more beneficial in terms of paying Social Security taxes—being employed or being self-employed? Do you think that paying Social Security taxes is worth it? Let us know in the comments section below.
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