Social Security Tax

What is Social Security Tax? 

The Social Security Tax is a payroll tax imposed by Internal Revenue Service (IRS) under Federal Insurance Contributions Act (FICA) to provide for Old-Age, Survivors, and Disability Insurance (OASDI) benefits. Such benefits provide retirement, disability, and survivor benefits to the worker after he/she contributes to the system. Each employee and employer pay a 6.2% tax on wages, while self-employed individuals pay 12.4%. 

The purpose of the Social Security Tax 

Providing benefits to retirees, disabled individuals, and survivors of deceased workers, the Social Security Tax is designed as a safety net for American workers and their families. It is currently implemented as a pay-as-you-go system under which the contributions of today’s workers support the benefits of today’s beneficiaries while keeping the Social Security Trust Fund under the IRS and Social Security Administration authority. 

With time, the taxable wage base increases steadily due to adjustments made for inflation so that the system survives continuous economic changes. Legislative updates such as that brought forth by the Social Security Amendments have periodically adjusted rates and caps to ensure the continued viability of the program. 

How is Social Security Tax Calculated? 

This amount is computed on wages received up to a certain limit for the taxpayer by a jointly employer-employee or wholly self-employed payment. This does the IRS define in terms of payroll withholding and tax filings. 

Social Security Tax is calculated by the following steps: 

• Calculate total wages or self-employment earnings for the year. 

• Social Security Tax rate applies: 6.2% employees pay and 12.4% self-employed. 

• The taxable amount must be subject to the annual wage base limit, e.g., by $168,600 for 2024 as adjusted for 2025. 

• Employers withhold and report the employee portion on Form 941, while the self-employed calculate it on Schedule SE. 

• The total contribution is remitted to the IRS, funding the OASDI program. 

Wage Base Limits for Social Security Tax 

The annual limit thus corresponds to the Social Security Tax wage base, representing the maximum coffer of earnings subject each year to this tax. This is established to balance the contributions equally across the income spectrum. 

The expected limit for 2025 is to rise from the projected $168,600 in 2024 due to inflation adjustments (exact figures are normally released by the Social Security Administration and found in IRS advice). Above this threshold, one earns that amount and above, and while being free from Social Security Tax, that income may still attract Medicare tax.