The Social Security tax makes up part of the Federal Insurance Contributions Act tax along with the Medicare tax. The percentage of the tax depends on your status as either an employee or self-employed. The Social Security tax applies to all earned income and is not reduced by pretax deductions such as contributions to a 401k plan.
When you work as employee, your employer must withhold the specified percentage from each of your paychecks. As of publication, the employee percentage of the Social Security tax equals 4.2 percent; however, this is a temporary reduction. Unless the lower rate is extended, the employee portion of the Social Security tax will rise to 6.2 percent in 2012. Employers continue to pay 6.2 percent. To figure your Social Security tax withheld from your paycheck, multiply your gross pay by the Social Security employee rate.
If you are self-employed or work as an independent contractor, no Social Security gets taken out of your paycheck. Instead, you are responsible for both the employer and employee portions of the Social Security tax on your income. This means you pay 10.4 percent of your self-employment income in Social Security taxes, the employee rate of 4.2 percent and the employer rate of 6.2 percent.
Limits on the Tax
Each year, the Social Security Administration adjusts the limit on the maximum earnings subject to the Social Security tax. As of publication, the limit equals $106,800. If you earn more than this, your employer will stop taking out Social Security taxes after you reach the annual limit. To figure the maximum Social Security taxes you will pay in a year as an employee, multiply the employee portion of the Social Security tax by the annual limit. For example, in 2011, the most an employee pays in Social Security taxes equals $4,485.60.
Self-Employment and Employee Income
If you work as both an employee and as an independent contractor and your total earned income exceeds the annual limit, you first pay the Social Security tax on your employee earnings. Then you pay the higher self-employed Social Security tax rate on only enough self-employment earnings to reach the annual income limit. For example, if in 2011 you have $90,000 in employment earnings and $60,000 in self-employment earnings, you would only have to pay the Social Security tax on $16,800 of your self-employment earnings.
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