If you're working in the United States, you'll see Social Security and Medicare tax withheld from your regular paychecks. Your income is taxed at a steady rate up to the Social Security tax limit, which generally increases from year to year, and your employer is taxed as well on your earnings. If you're self-employed, you're responsible for both the employee and employer portions.
The Social Security rate paid by employees is 6.2 percent, until you hit the maximum income affected by Social Security tax. Employers pay another 6.2 percent of your salary in Social Security tax; this means self-employed people pay both parts.
Social Security and Medicare Tax
Unlike ordinary federal income tax brackets, which tax higher incomes at a higher rate, Social Security tax is a flat tax. Employees are taxed at a rate of 6.2 percent, and employers make a matching payment, up to a maximum income level. In the 2018 tax year, that's $128,700. Social Security taxes are designed to pay for benefits when you become old or if you become disabled. In some cases, Social Security can also help support your family if you die.
Medicare tax is also withdrawn from your paychecks. Collectively, the two taxes are known as FICA tax, for the Federal Insurance Contributions Act. Medicare, which provides health insurance to seniors and disabled people, taxes you and your employer each at 1.45 percent of your salary. Unlike Social Security tax, there is no upper limit on Medicare tax. In fact, wages earned above $200,000 in a year face an additional 0.9 percent tax, for a total tax of 2.35 percent on those higher wages. That portion of the tax applies only to the employee, and there is no matching tax on the employer.
If you have multiple employers, and your total earnings were above the Social Security tax cap, and collectively they withheld too much Social Security tax, you can get a credit for this excess tax against your income tax when you file your taxes.
FICA Taxes for the Self-Employed
If you are self-employed, you are still responsible for paying into the Social Security and Medicare tax system. You're expected to pay both the employer and employee portions of the tax. You compute and pay this by filling out Schedule SE on your IRS
Generally, you'll owe 12.4 percent in Social Security tax on earnings up to the annual limit. You'll also owe 2.9 percent in Medicare tax on all self-employment earnings, plus an additional 0.9 percent in Medicare tax on earnings above $200,000. You can, however, deduct the employer portion of the tax from your taxable income for ordinary income tax purposes, since it's essentially a business expense. You do not have to itemize your taxes to take this deduction.
Tax Changes for 2018
As of 2018, the Social Security tax applies to earnings up to $128,700. Anything after that is not subject to the tax. There's no limit on the Medicare tax.
Additionally, a new pass-through income deduction of up to 20 percent of business earnings for people who own partnerships or are self-employed can effectively offset the self-employment tax. It can then be more lucrative, rather than less, to make a certain amount by owning your own business rather than working for a salary for someone else.
- Social Security: How Social Security Can Help You When a Family Member Dies
- IRS: Topic Number: 751 - Social Security and Medicare Withholding Rates
- IRS: Form 1040
- IRS: Schedule SE (Form 1040), Self-Employment Tax
- IRS: Topic Number 608 - Excess Social Security and RRTA Tax Withheld
- Social Security: Social Security & Medicare Tax Rates
- Reuters: Social Security Wage Base Increases to $128,700 for 2018
- Tax Policy Center: Navigating The TCJA’s Pass-Through Deduction
- 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.
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- Internal Revenue Service. "Form 1040," Pages 1-2. Accessed April 28, 2020.
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- 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.
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Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.