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What percentage of gross income is withheld as an employee’s contribution to Social Security?

Calculating social security taxes

The social security payroll tax is mandatory for every employer and employee in the United States. The employer is responsible to hold back the amount owed in Social security tax on the behalf of the employee. The employer then contributes to the federal agencies. Social Security is a FICA tax while the other one is Medicare.

There is a separate tax for self-employed individuals. They pay the self-employment tax in which they pay for both the employer and employee side of the FICA tax.

So, what percentage of the income is to be withheld from an employee’s wage to contribute to Social Security? Keep reading to learn more about it.

What is the use of social security?

The social security tax is what goes back to the people in an indirect manner. The tax collected is kept aside to help the retired people, disabled, widows, and widowers, etc. The tax is also referred to as Old-Age Survivors, and Disability Insurance (OASDI).

What are social security tax rates?

The ongoing tax rate for social security is 6.2% for both the employer and the employee. The total tallies up to 12.4%. Whereas, for Medicare, it is 1.45% for employer and employee, adding up to 2.9%.

The maximum sum that is subjected to the OASDI tax is $142,800 as of 2021. The annual employee contribution to the tax tallies up to $8,853.60.

Set by Congress, the amount for each year can vary from the previous one. For employees to check the limit, they can refer to IRS Publication 15 (For agricultural workers, it is Publication 51).

In Publication 15 of IRS, it is mentioned that incomes subjugated to FICA include all the work done by employees.

The wages include bonuses, salaries, paid vacation leave, sick time, or commissions. Goods, food, services, clothing, or lodging as a form of payment are also included unless one is an agricultural worker or a household worker.

Health Savings Account (HSA) contributions by the employer are not counted as wages. Also, selective augmentation for retirement planning is subjected to FICA. Whereas, accidental care, health insurance, etc. by the employer for the employee, their spouse, and dependents are not counted in FICA and are not considered as wages.

Taking an example, say an individual earns about $20,000 per year. And they choose to add their $4000 into their 401k plan and the employer adds their 25% or the $1,000. The elective deferral is still subject to FICA and the added employer given by the employer is not.

So, for the individual having a $20,000 wage, the tax withheld from this amount would be $1,200 (That is: 20,000 x 6.2%).

Let us say that the individual earns more than the tax cap of $20,000 from more than one employer. This means that the individual has to pay more taxes than necessary. Whenever an overpayment is made, the amount is added to the employee’s tax bill or gets refunded.

➡LEARN MORE: What happens if I claim the American opportunity credit for more than 4 years?

Calculation of social security tax

Social security
  • The employee’s wage is to be multiplied by the tax rate of Social Security. This does not depend on the frequency of payment made to the employee. The taxes are always calculated the same way.
  • Let us assume the payment made by the employer to an employee is $1000.
  • The employer will then multiply $1000 by 6.2 percent to get the amount withheld for the taxes.
  • That will give us: 1000 x 0.062 = 62
  • That means from a $1000 paycheck, the employer will have to hold back $62 for the social security tax. This also means that, that the employee also has to withhold $62 from their paycheck for the FICA tax.
  • When the employer begins to earn more than $142,800 in 2021, the employer has to stop holding the tax and making the contribution to the Social security agencies from the employee’s paycheck.
  • If the employee wages have not reached $14,800, the employer has to continue holding back and paying the taxes.

One can even use an online tax calculator to aid them in the process. The estimate is made quarterly and the employer is advised to pay these taxes on time to avoid late payment penalties. 

How does a social security tax operate?

The tax is calculated based on the gross pay of the employee.

  • The gross pay can be found out by the pay period. Meaning based on how the employee is working, salaried, or hourly workers. 
  • The total amount of the year that is withheld for social security and federal taxes is calculated with the help of a W-4 Form.
  • The gross amount is also calculated by holding back pay for state and Medicare taxes.

The employer and the employee contribute to the FICA taxes by halves. 

What is not counted in the wages?

Compensation payments are not subject to FICA tax. They are exempted from being considered Social Security wages:

  • Disability insurance: Disabled workers who are entitled to disability insurance are paid after the year. These are not counted in social security. 
  • Business Travel: Employees traveling for business purposed and reimbursed for the money they pitch in. The amount should not exceed the set limit by the government, and they should follow the general mileage rate.
  • Compensation for domestic work: For employees under 18 or 21 with family are paid compensation for domestic work.
  • Any amount that has not been mentioned by the law.
  • Employee insurance is offered by the employer. 
  • Partnership payments to the involved parties in the business.
  • Pensions plans for the employees. 
  • The employee who receives tips lesser than $20 per month is not counted for social security. 
  • Compensation benefits to workers are offered by the employee. 
  • Legal employees like sellers, real estate agents who are paid by the employee are not counted for social security. 

Author’s note

Social Security is a crucial part of the United States tax system. This amount collected is used for pensions and the healthcare system.

The rules around it change each year, it is advised that both the employer and the employee keep an eye on the news for any new changes in the taxes system. Any misinformation can lead to underpayment that may harm either party in the long run.

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