How to Calculate Social Security Tax

••• Calculating payments image by Christopher Meder from Fotolia.com

If you work, you pay taxes into Social Security, whether it’s taken out of your paycheck or you pay it as part of the self-employment tax. For 2020, the Social Security tax is 12.4 percent, 6.2 percent of which is paid by your employer while you pay the other 6.2 percent. To calculate the Social Security tax, you multiply an employee’s wages by 6.2 percent, adding a Medicare tax and matching the amount for a total of 15.3 percent.

What Constitutes FICA?

If you’re an employer with employees on your payroll, you’re responsible for deducting Social Security from their pay. This is done under the heading of FICA, which stands for the Federal Insurance Contribution Act. This tax helps fund both the employee’s future Social Security retirement income and their post-retirement health insurance, known as Medicare.

To calculate FICA tax deductions, you’ll first need to know what’s included. In addition to the 6.2 percent that goes toward Social Security, there’s also a 1.45 percent Medicare tax, for a total of 7.65 percent. You, as the employer, are responsible for chipping in 7.65 percent toward each employee’s Social Security and Medicare account for a total FICA of 15.3 percent.

Calculate FICA Tax Deductions

As an employer, you’re responsible for making sure the correct taxes are paid out on every paycheck. This will be part of the payroll tax you calculate each pay period. There may also be state and local taxes that you’ll need to calculate in addition to FICA.

To calculate the FICA portion of an employee’s tax withholding, you’ll multiply the employee’s taxable wages by the appropriate social security tax rates. This should be done separately to get both the Social Security and Medicare portion of the tax.

An example of an employee with a paycheck of $600 is as follows:

  • Social Security tax: $600 x 6.2 percent = $37.20
  • Medicare tax: $600 x 1.45 percent = $8.70

You’ll need to match this contribution with $37.20 and $8.70 out of your own account.

The Wage Base Limit

The FICA tax does have limitations. The Social Security tax has what’s known as a “wage base limit,” which only taxes a person’s annual income up to a certain amount. This social security wage change from one year to the next, so it’s important to keep track of it if you’re taking FICA tax out of an employee’s paychecks.

For 2020, the wage base limit is $137,700. For employees whose projected income for the year is $137,700, that means that Social Security tax will only be paid on earnings of up to $137,700. The Medicare tax does not have a limit, so you would continue to pay Medicare taxes even when Social Security taxation has reached its limit.

What Are Payroll Taxes?

Medicare and Social Security aren’t the only taxes that apply to an employee’s taxable wages. As a business owner, the payroll taxes you’re responsible for remitting on each employee include the following:

  • Federal income tax
  • State and local income tax
  • FICA taxes
  • Federal and state unemployment taxes

Paying Payroll Taxes

Businesses should determine when and how to pay federal income tax from the start. As you start adding employees, this will get a little more complicated, but you’ll at least know whether to deposit your taxes monthly or semi-weekly. For the first year, you’ll make monthly tax deposits, which will be due by the 15th of each month.

From your second year forward, your payroll taxes will be subject to something called a “lookback period.” This is an estimate of your yearly taxes based on your total gross income payroll taxes for the previous year, ending on the most recent June 30. Either you or your tax professional will submit these taxes via electronic funds transfer using the Electronic Federal Tax Payment System.

FICA for the Self-Employed

The Federal Insurance Contributions Act applies to all wage-earning workers, regardless of employment status. If you’re self-employed or run your own business, you won’t have an employer to submit your Social Security and Medicare taxes to the Social Security Administration. Paying these taxes not only keeps you compliant with tax laws, but it also ensures you have money available to you when you’re ready to retire and claim your social security benefits.

Unfortunately, as a self-employed worker, you won’t have an employer to match your contributions. That means you’ll pay the full amount yourself. This is called the self-employment tax, and it will be 15.3 percent of all your taxable wages. If you earned $137,700 or more in 2020, you’ll only pay Social Security tax, 12.4 percent, on that amount. You’ll pay 2.9 percent for Medicare taxes for the full amount.

Paying Self-Employment Tax

For self-employed individuals, the full tax comes due at tax time. However, if you’re expected to owe taxes of $1,000 or more, the IRS recommends that you make estimated quarterly tax payments. This means four times a year – in mid-January, mid-April, mid-June and mid-September – you’ll submit a payment to the IRS equal to one-fourth of the taxes you anticipate you’ll owe.

But how do you know what you’ll owe? The IRS helps with that, as well. IRS Form 1040-ES has a worksheet that walks you through calculating it, asking what your anticipated income and profits will be, then multiplying it by the appropriate tax rates to arrive at an amount. The form also includes a form you can submit with your payment if you choose to mail it in rather than paying it at IRS.gov/Payments.

Coronavirus and 2020 FICA Payments

The Coronavirus, Aid, Relief and Economic Security Act, also known as the CARES Act, has given employers some temporary relief on payroll taxes. Section 2302 allows employers to defer paying their portion of Social Security taxes through December 31, 2020.

It's important to note that this is a deferral, not complete forgiveness. You’ll still be responsible for paying the taxes. Half of the amount you deferred will be due on December 31, 2021, while the other half will be due on December 31, 2022.

Employers are still required to take a Social Security tax and additional Medicare tax from each employee’s wages, as well as match that amount for a total of 15.3 percent. This amount is paid as part of payroll taxes on a scheduled basis.