Overview of Social Security Tax
The Social Security tax, also known as the Old-Age, Survivors, and Disability Insurance (OASDI) portion, is a federal tax assessed on earned income, including both compensation from employment and self-employment earnings under the Federal Insurance Contributions Act (FICA). As of 2011, the OASDI tax rate is 12.4% on earnings up to $106,800.
Employer and Employee Contributions
Employers are responsible for withholding half of the OASDI tax (6.2%) from their employees’ wages and for making a matching contribution of the remaining half. These combined taxes are then deposited with the IRS at regular intervals. Self-employed individuals, on the other hand, are required to pay the entire 12.4% OASDI tax themselves, which they include with their quarterly estimated income tax payments.
Examples
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Employee Scenario: Jane is employed at a company and earns $60,000 a year. Her employer will withhold 6.2% of her salary ($3,720) for the Social Security tax and will also contribute an additional $3,720, making the total Social Security tax contribution $7,440.
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Self-Employed Scenario: John is a freelance graphic designer with an annual income of $80,000. John must pay the full 12.4% OASDI tax himself, which amounts to $9,920. This payment is made quarterly along with his estimated income tax.
Frequently Asked Questions (FAQs)
What is the Social Security tax rate?
As of 2011, the Social Security tax rate is 12.4% of earnings up to a certain limit, which was $106,800 in 2011.
How is Social Security tax calculated for employees?
For employees, 6.2% of their earnings up to the limit is withheld by their employer, who also makes a matching contribution of 6.2%.
How do self-employed individuals pay Social Security tax?
Self-employed individuals pay the entire 12.4% of their earnings up to the limit, which is included with their quarterly estimated income tax payments.
What is the purpose of the Social Security tax?
The Social Security tax funds the Old-Age, Survivors, and Disability Insurance (OASDI) program, which provides benefits to retirees, disabled individuals, and survivors of deceased workers.
Are there any earnings limits for the Social Security tax?
Yes, as of 2011, the Social Security tax applies to earnings up to $106,800.
Related Terms
- Federal Insurance Contributions Act (FICA): U.S. federal law that mandates a payroll tax for Social Security and Medicare.
- Medicare Tax: A federal tax that funds the Medicare program, often considered alongside Social Security tax under FICA.
- Estimated Tax: Quarterly payments made by self-employed individuals and others not subject to withholding to cover income and self-employment taxes.
- Withholding Tax: The amount of an employee’s income taken out by the employer and sent directly to the government as partial payment of income tax.
Online Resources
- IRS - Social Security and Medicare Tax Rates
- U.S. Social Security Administration
- Internal Revenue Service
Suggested Books for Further Studies
- “Social Security, Medicare and Government Pensions: Get the Most Out of Your Retirement & Medical Benefits” by Joseph Matthews
- “Your Complete Guide to Social Security and Medicare: When to Start, How Much to Expect, and Everything You Need to Know About How the System Works” by David A. Littell
- “Social Security Explained” by Ty Bernicke and Gregory Bernicke
Fundamentals of Social Security Tax: Taxation Basics Quiz
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