The U.S. Social Security tax refers to the tax imposed on both employee and employer to help shoulder Social Security costs. During the course of an individual’s working life, a certain amount is deducted from their income and put into a pool of funds for Social Security payments. The money is not set aside for each individual, as is true with money taken out of a paycheck for a retirement account.
The Social Security tax ensures that money is available for individuals once they reach the age of retirement or are forced to prematurely leave the workforce. In the United States, the number of individuals who are subject to Social Security tax continues to change dramatically over the years.
Social Security Tax and Self-Employment
For those who are self-employed, both the employee and employer portions of Social Security tax must be paid by the individual. They must pay the full Social Security tax rate, calculated as self-employment taxes on the Schedule SE form that must be submitted by all self-employed workers. It includes Medicare taxes, as well as self-employment taxes.
However, the upside to self-employment – because it requires paying both sides of the tax – is that an above-the-line deduction can be made on Tax Form 1040. It enables a self-employed worker to adjust their income and reduce the self-employment tax by up to 50%.
What it ultimately means is that a self-employed person must list and claim both sides of the Social Security tax; however, they end up being able to avoid paying the employer portion of it. Or, they don’t need to pay income tax on that portion of their income. The Schedule SE form allows the individual to calculate the amount they can claim for the above-the-line deduction.
There is little variety in Social Security taxes. They operate primarily as a sort of flat tax, with every working individual paying the same percentage amount, no matter how much their earnings are. The exception to the rule is the self-employed worker, who must pay the full Social Security tax – both the employer and employee portion – as discussed above.
In general, employees pay a flat 6.2%, which is withheld from their paycheck. The employer then pays the remaining 6.2%. Starting in 2018, all self-employed workers are charged a single, flat 12.4%; however, it is limited up to a certain dollar amount (which is 6.2% up to the maximum wage base for the employee portion and 6.2% of the wage earnings base from the employer side).
Social Security taxes are mandatory. The rules regarding the amounts are different between traditional workers and self-employed workers, but the final result is ultimately the same. The taxes are collected and pooled, saved, and distributed to those of retirement age or those who can no longer work so that they can, hopefully, continue to live in moderate comfort after retiring from the workforce.