Understanding Social Security Tax in the US
The US is one of the many countries in the developed world that levies a tax on its citizens to help ensure the welfare of the general public. This tax is called the Social Security Tax. There are many details about the Social Security Tax that everyone living in the US should know. We will attempt to cover them all in this article.
We will discuss:
- What is the Social Security Tax?
- Social Security Tax Breakdown
- How to Calculate Social Security Tax
- The Math for Social Security Tax
- Who is Exempted from the Social Security Tax?
- When Can I Stop Paying Social Security Tax?
- How to Claim Social Security Tax Refund
- How to Report Social Security Tax
- Useful Resources
What is the Social Security Tax?
In the US, the Social Security Tax is imposed on both employers and employees to fund the Social Security program. It is collected as a payroll tax mandated by the Federal Insurance Contributions Act (FICA) or as a self-employment tax mandated by the Self-Employed Contributions Act (SECA).
Collections made from the Social Security tax are used to pay for the retirement, disability, and survivorship benefits received by millions of Americans under the Old-Age, Survivors, and Disability Insurance (OASDI) Program. These benefits are the only consistent source of income for people with meagre earnings. Pensioners and others who are otherwise unable to work due to any kind of sickness or injury are beneficiaries of the OASDI Program a.k.a. Social Security.
Social Security Tax Breakdown
The Social Security Tax is one part of the FICA taxes; the other part is the Medicare tax. Both these taxes are charged at a fixed rate – 12.4% for Social Security and 2.9% for Medicare. Further, both these taxes are shared equally by employers and employees. For the purpose of this article, we will only explore the Social Security tax.
You no longer have to pay Social Security tax in 2020 if your total income during this year is above $137,700. This amount is called the maximum wage base and all income above this limit is exempted from this tax. The maximum wage base increases every year in order to keep up with inflation.
Half of this tax is paid by the employee in the form of payroll withholding and the other half is borne by the employer. This means employees pay 6.2% of their wages up to the maximum wage base, and employers pay 6.2% of their employee's wage earnings up to the maximum wage base, making a total of 12.4%.
How to Calculate Social Security Tax
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To find out how much of an employee’s wages are to be withheld as Social Security tax, you should multiply the employee’s total wage by the tax rate. Since the current rate is 6.2% for employees, suppose you have to pay an employee $1,000, multiply the $1,000 by 6.2% to find out how much to withhold from the employee’s wages.
$1,000 x 0.062 = $62
So, you should be paying this employee $938 and paying $62 from their wages plus $62 as your contribution towards Social Security tax. When the employee’s wage reaches $137,700 in 2020, you can stop withholding and contributing Social Security tax.
Calculating Social Security Tax for Self-employed People
Self-employed persons must pay both the shares of the Social Security tax paid by the employee and employer. They need to pay the combined rate of 12.4% on their total earnings until it reaches the maximum wage base. This will be counted under the self-employment tax on Schedule SE.
You can claim above-the-line deduction for one-half of your self-employment tax as an adjustment to income. That portion of the earnings is exempted from income tax. Schedule SE gives you the total above-the-line deduction amount that you can claim.
Calculating Social Security Tax for More Than One Job
It’s very important to keep the wage base limit in mind when you work for more than one employer. Suppose you earn $100,000 from Job 1 and $100,000 from Job 2. This way, your total income has already crossed the wage base threshold. In such a case, neither of your employers can withhold any further Social Security tax from your paycheck. They don’t even require to pay half the 12.4% on your behalf until year's end.
It doesn't matter that neither of the jobs has reached the wage base threshold individually. The wage base applies to your total income. In case both your employers are unaware that you’ve collectively reached the wage base, it is your responsibility to notify each of them to stop withholding the amount from your salary. In case you can’t do this, you have the option to claim reimbursement while filing your taxes at the end of the year. However, this process can get rather tedious, so you can take some help from E-file to simplify the process. You can also use H&R Block to help you figure out the maximum refund you can claim on your taxes.
The Math for Social Security Tax
Instance 1 – If your wages are less than or equal to $137,700 in 2020
Multiply the amount by 6.2%. This will give you the amount you and your employer are each required to pay, in order to reach a total of 12.4% Social Security tax rate.
If you are self-employed, multiply your wage by 12.4%. This will give you the amount required to pay for the Social Security portion of your self-employment tax.
Instance 2 – If your wages are more than $137,700 in 2020
Multiply $137,700 by 6.2% to get the amount you and your employer must pay individually. Anything you earn over this threshold is exempted from the Social Security tax.
Multiply $137,700 by 12.4% if you're self-employed. Extra over the threshold income is exempt from Social Security tax.
For taxes due in April 2020, the threshold will be counted as $132,900 as it falls under the 2019 tax year.
Who is Exempted from the Social Security Tax?
Every working professional in the United States — employers and employees — need to pay the Social Security tax on their income. It is not optional. However, there are a few groups exempted from receiving Social Security benefits and are in turn, exempted from paying Social Security tax on their income.
Qualifying Religious Groups
If and only if a certain religious group is officially denied Social Security benefits, such as retirement, disability, and death benefits, it qualifies for Social Security tax exemption.
Non-resident Aliens (Non-U.S. Residents or Non-Citizens)
A person may qualify for exemption based on the type of visa he/she has been issued. Examples of non-resident aliens include international students/teachers, non-residents working for foreign governments, temporary students who get a job at their university are also eligible for Social Security tax exemption.
Foreign Government Employees
Individuals working for a foreign government can be exempted from paying Social Security taxes on their income. Their employees, spouses, children qualify for the same only if they are also employees of the foreign government.
When Can I Stop Paying Social Security Tax?
Generally, Social Security benefits are not taxable after 65. It depends primarily on the other source/s of income available to the individual. As of 2017, retirees without spouses who have attained 65 years need to file an income tax return if their gross earnings exceed $11,850. The beneficiaries of Social Security are not required to pay federal income taxes.
How to Claim Social Security Tax Refund
Paying Social Security tax is a mandate, but you should always keep a track of the amount you are paying. This will save you from paying more than the fair share. If you work for more than a job, and your earnings exceed the Social Security wage base limit, make sure you don’t overpay your taxes. In case you do, make it a point to claim them on your tax return. While filing your tax return, look for the section on Form 1040 where you can mention that you had overpaid for Social Security taxes. Americans are by default known for bypassing this step.
How to Report Social Security Tax
Form 941 is generally used by employers to report FICA taxes and other withholding taxes. This form must be submitted on a quarterly basis. Some businesses also use Form 944 to report Social Security, Medicare, and federal income taxes. This needs to be submitted annually. The Internal Revenue Service (IRS) will have you updated if your business qualifies to use Form 944.
Deposit for Social Security taxes along with Medicare and federal income taxes needs to be made by the employer on a monthly or semiweekly basis. It is prudent to use EFTPS to deposit your payroll taxes. Late tax deposits call for an additional fee.
You can get your work smoothly done through FreeTaxUS. It takes all the hassle out of taxes. They offer fast, easy, and secure e-filling, giving customers the ability to file their federal and state income taxes in as little as 30 minutes. This program offers a 90-day cookie duration.
By Jan 31 each year, employees should be given Form W-2. This form records the amount of employment taxes withheld from their salaries during the last year. Employers also need to submit Form W-2 and Form W-3 recording the taxes withheld for the current year to the Social Security Administration and the State Tax Agency.
You file your taxes for free via TaxAct.
For help with tax extensions, head over to TaxExtension. It is an IRS-certified portal that can guide you through the process of filing for extensions on your taxes.