The Social Security tax, also known as Old Age, Survivors, and Disability Insurance, or OASDI, is imposed by the federal government to pay for retirement benefits. When you see “OASDI” or “FICA” as a deduction on your pay stubs year after year, you might start to wonder, “When do you stop paying Social Security tax?” After all, it would be nice to have that extra money in your bank account instead of it going to Uncle Sam.
Don’t hold your breath: You could be paying the Social Security tax for the rest of your life, even after you start drawing your Social Security benefits in retirement, if you continue to have income that’s subject to Social Security taxes.
Ages for Social Security Tax
There is no minimum or maximum age for paying the Social Security tax. If you have income that is subject to the tax, you must pay it whether you’re just a child or even if you’re already receiving Social Security benefits. However, you may not have to pay the Social Security tax on some or all of your income depending on the type and amount of income.
Income Subject to Social Security Tax
The Social Security tax only applies to earned income, but not unearned income. Therefore, you will pay Social Security tax on your wages, bonuses, salary and net self-employment income. However, you won’t pay Social Security taxes on unearned income like your investment income, interest, rental income, pensions, distributions from retirement accounts and even your Social Security benefits.
For example, say you earn $60,000 from your main job, $20,000 from a side hustle where you’re paid as an independent contractor, $5,000 in investment income and $6,000 in rental income from renting out your basement. You would only pay the Social Security tax on the $60,000 salary from your employment and the $20,000 of net self-employment income from your side hustle.
Social Security Tax Rate
The Social Security tax rate is 12.4 percent. For employee income, 6.2 percent of the tax is paid by your employer and 6.2 percent is withheld from your paycheck. If you’re self-employed, you pay the entire 12.4 percent because you’re both the employee and the employer.
However, the tax code does contain two ways to make sure you’re not paying more in total as a self-employed person than you would pay as an employee. First, the Social Security tax only applies to 92.35 percent of your net self-employment income to make up for the fact that employees don’t have to pay taxes on the portion of FICA taxes that their employer pays on their behalf. Second, when you compute your income taxes, you can deduct the employer portion of the Social Security tax because employees don’t have to count the portion of FICA taxes their employer pays for them as taxable income.
Read More: Social Security Benefits and Tax Thresholds
What Is the Medicare Tax?
The Medicare tax is the other tax that applies to earned income and is part of FICA taxes and self-employment taxes. This tax is intended to fund the Medicare benefits made available to senior citizens.
The Medicare tax, sometimes called the HI tax or Hospital Insurance tax, also applies to earned income, but the rate is much lower at 2.9 percent. If you’re self-employed, you pay the entire 2.9 percent yourself, but if you’re an employee, you pay 1.45 percent and your employer pays 1.45 percent on your behalf.
Read More: Uncollected Medicare Tax on Tips
When You Stop Paying
When it comes to the Medicare tax, taxpayers have had to pay the full tax on all of their earned income, regardless of how much they make, since 1993. So, whether you have $10,000 or $10 million of earned income for the year, you’re going to pay the Medicare tax on all of it.
The Social Security tax, on the other hand, does have a cap for how much of your earned income you pay taxes on, which is known as the contribution and benefit base. The contribution and benefit base adjusts each year for inflation. For 2021, you only pay the Social Security portion of the tax on the first $142,800 of your income.
The contribution and benefit base is separate for each taxpayer, even if you’re married and file a joint return. For example, if your salary is $60,000 and your spouse makes $238,400, your spouse won’t pay the Social Security tax on the last $95,600 of earned income because your spouse is over the contribution and benefit base. However, you will pay the Social Security tax on your entire salary because you don’t make more than the contribution and benefit base.
Student Exemption to FICA Taxes
The tax code does contain one exemption to earned income being subject to the Social Security tax and Medicare tax: income earned from working at a school where your primary relationship is as a student. Whether your primary relationship with the employer is as a student is determined on a case-by-case basis.
For example, if you work in the recreation center on campus while you’re a full-time student, your wages are exempt from the Social Security tax and Medicare tax because your primary relationship with the college is as a student. However, if you worked part-time at a local gym instead, even though you’re currently a full-time student, your wages would be subject to the Social Security tax and Medicare tax because even though your primary focus is being a student, your primary relationship with the local gym is as an employee, not as a student.
Earned Income from Multiple Sources
If you have multiple sources of earned income, such as if you work multiple jobs or if you’re self-employed in addition to your day job, it’s possible you’ll have too much withheld from your paychecks for Social Security tax or that you will have questions as to which income is subject to Social Security taxes first.
For example, say one job pays you $112,000 and another pays you $36,400. Neither job pays you more than the contribution and benefit base, so neither employer knows that not all of your income will be subject to the Social Security tax. As a result, both employers will withhold Social Security taxes on your entire salary.
But, taken together, you earned $5,600 over the contribution and benefit base. You aren’t allowed to tell either employer to stop withholding Social Security taxes from your paychecks. But, when you file your income tax return, you will receive a tax credit equal to the amount of the extra withholding so you’ll get the excess back as a tax refund.
Wages and Self-Employment Income
Alternatively, say you have a $108,400 salary and you also have your own consulting firm on that side that brings in $40,000 of net self-employment per year. Between the two streams of earned income, you’re $5,600 over the contribution and benefit base.
But, it makes a big difference to your bottom line whether you have to pay the full 12.4 percent Social Security tax on all of your self-employment earnings first and then $5,600 of your employee income avoids the Social Security tax that would be paid only half by you and the other half by your employer, or whether you only pay the full 12.4 percent of the Social Security tax on $5,600 of self-employment income because the employee income is counted first when figuring the contribution and benefit base.
The tax code has good news for you: Employee income is counted toward the contribution and benefit base first. Therefore, you only pay the full 12.4 percent on $5,600 of self-employment income, because that puts you over the $142,800 contribution and benefit base and you can stop paying the Social Security tax on the last $5,600 of your self-employment income.
What Is the Additional Medicare Tax?
If you’re a high earner, you might owe not only the standard Medicare tax, but also the additional Medicare tax, on some of your earned income for the year. The additional Medicare tax is an extra tax on earned income in excess of the threshold amount for your filing status.
If you’re married and file a joint return, the tax doesn’t kick in until your combined earned income exceeds $250,000. But, if you’re married and file separate returns, the additional Medicare tax kicks in when either spouse exceeds $125,000 of earned income on his or her income tax return. For singles and heads of household, the threshold is $200,000.
If you work as an employee, your employer will start withholding for the additional Medicare tax when your earned income at that job exceeds $200,000, regardless of your filing status. You can’t request that your employer not withhold until you cross $250,000 if you’re married and plan to file a joint return, or request that your employer start withholding once you exceed $125,000 if you’re married but will file separate returns. Instead, you’ll have to make up any underpayment, or receive any excess withheld as a refund, when you file your income taxes.
There is no “additional Social Security tax” or any Social Security equivalent to the additional Medicare tax as of 2020.
Penalties for Not Paying Tax
If you don’t pay Social Security taxes, your Social Security benefit checks could be lower than you expect when you retire, or you might not qualify for Social Security benefits at all. To be eligible for benefits, you must earn at least 40 credits during your working years. Each year, you can earn up to four credits based on your income. As of 2020, you earn one credit for every $1,410 you have that’s subject to Social Security and Medicare taxes, so if you have at least $5,640, you will earn the maximum of four credits for the year.
Once you’ve earned your 40 credits, you still have an incentive to keep working and accurately paying your Social Security taxes because your monthly retirement benefits are based on your 35 highest-earning years. Each year is indexed for inflation, so the amount that you earned 20 years ago will be adjusted to today’s dollars. If you work less than 35 years, the Social Security Administration substitutes zero dollars in for each year less. For example, if you work 30 years, you would add up the amount of income subject to the Social Security tax in those 30 years and then add five zeros to calculate your average.
In addition, if you don’t have enough money withheld during the year for taxes, including the Social Security tax, you will have to make it up when you file your income tax return. If your withholding amount doesn’t meet the minimum thresholds, the IRS will also impose interest and penalties for your underpayment. For example, if you’re self-employed, you generally need to make estimated tax payments throughout the year to avoid an underpayment penalty.
- IRS: Topic No. 560 Additional Medicare Tax
- IRS: Student Exemption to FICA Taxes
- IRS: Topic Number: 751 - Social Security and Medicare Withholding Rates
- IRS: Publication 15
- Social Security Administration: Contribution and Benefit Base
- Social Security Administration: Your Retirement Benefit: How It’s Figured
- Social Security Administration: Social Security Credits
- Social Security Administration: Income From Pensions, Annuities, Interest, And Dividends
- Social Security Administration: Retirement Benefits
- Social Security Administration. "If You Are Self-Employed," Page 1. Accessed April 28, 2020.
- Social Security Administration. "If You Are Self Employed," Pages 1-2. Accessed April 28, 2020.
- Internal Revenue Service. "Topic No. 554 Self-Employment Tax." Accessed April 28, 2020
- Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed April 28, 2020.
- Internal Revenue Service. "Form 1040," Pages 1-2. Accessed April 28, 2020.
- Internal Revenue Service. "2019 Schedule 1." Accessed April 28, 2020.
- Internal Revenue Service. "2019 Schedule 2." Accessed April 28, 2020.
- Internal Revenue Service. "2019 Form 1040," Page 2. Accessed April 28, 2020.
- Social Security Administration. "Social Security Handbook." Accessed April 28, 2020.
- Social Security Administration. "Benefit Calculation Examples for Workers Retiring in 2020." Accessed April 28, 2020.
- Social Security Administration. "Contribution and Benefit Base." Accessed Oct. 14, 2020.
- Social Security Administration. "Quarter of Coverage." Accessed Oct. 15, 2020.
- Social Security Administration. "Benefits Planner | Social Security Credits." Accessed Oct. 15, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."