Social Security is a federal social benefits program that provides workers with a variety of benefits, including income during retirement and benefit payments in the case of a long-lasting disability. The government funds Social Security with a tax on income; Social Security taxes only apply to a certain amount of income earned each year.
Social Security Tax Income Limit
According to the Social Security Administration, Social Security taxes apply to the first $106,800 of earnings in 2011. Employees are subject to a 4.2 percent tax rate on the first $106,800 of earnings and employers are subject to a 6.2 employment tax rate that also goes toward funding the social security system. Self-employed individuals must pay both the employer and employee's share of the tax, so their Social Security tax rate is 10.4 percent.
Income Limit Changes
The amount of income that is subject to Social Security taxes has historically been adjusted upward over time to increase funding for the Social Security system. The Social Security Administration states that in 1980, only $25,900 of income was subject to Social Security tax; in 1990, the figure was $51,300; and in 2000, the amount of income subject to the tax was $76,200. It is likely that the income maximum will continue to increase in the future.
Maximum Amount of Tax Paid
For 2011, the maximum amount that an employee can be required to pay into the Social Security system is 4.2 percent of $106,800, or $4,485.60. Once you have paid this amount, additional income will no longer be subject to Social Security tax. The Social Security Administration notes that if you work more than one job, your withholding for Social Security may exceed maximum levels. In this case, you will be due a refund for overpayment when you file a tax return.
The Social Security tax is sometimes considered a regressive tax. A regressive tax is one that tends to cause those with lower incomes to pay a greater proportion of their incomes toward the tax than those with higher income. For example, a worker with an income of $50,000 has to pay 4.2 percent of his total income toward Social Security while a worker that earns $1 million would only pay $4,485.60, which is less than 1/2 of a percent of his total income.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.