The Social Security program provides income to retirees and disabled workers who contributed into the system during their working lives. The government pays for Social Security through payroll taxes that apply to employees, employers and self-employed workers. Social Security tax applies only to earned income such as wages, salaries and self-employment income. The amount you pay toward Social Security tax depends on your employment status and annual income.
Employees are subject to a Social Security tax rate of 4.2 percent for the 2012 tax year, which applies to the first $110,100 of income earned for the year. The Social Security tax is sometimes considered a regressive tax because workers who earn more than the annual limit of $110,100 pay a smaller percentage of their annual income toward Social Security than workers with income below the limit. The government periodically adjusts the maximum taxable earnings limit upward to keep pace with inflation.
Employers are responsible for paying Social Security taxes to the federal government based on the income earned by employees. Employers face a Social Security tax rate of 6.2 percent for each dollar employees earn, up to the $110,100 maximum for each worker. Business owners with employees are responsible for withholding money from employee pay to cover the employee share of the Social Security tax.
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Self-employed workers including small business owners, independent contractors and freelancers have to pay both the employee and employer portions of Social Security tax on self-employment income. This means self-employed workers face a Social Security tax rate of 10.4 percent up to the maximum of $110,100. Self-employed workers are not subject to tax withholding, so they generally have to pay income tax, Social Security tax and Medicare tax by making estimated tax payments four times a year.
Payroll Tax Social Security
The Social Security tax rates valid in the 2011 and 2012 tax years are the result of a payroll tax cut. The tax cut reduced the employee Social Security tax rate from 6.2 percent to 4.2 percent and the self-employment rate from 12.4 percent to 10.4 percent. The payroll tax cut is set to expire at the end of 2012, meaning Social Security tax rates will revert to pre-2011 rates starting in 2013 if the government does not act to extend the tax cut.
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