An income cap limits the tax
Reviewed by Andy SmithFact checked by Suzanne Kvilhaug
The Old Age, Survivors, and Disability Insurance (OASDI) tax, more commonly referred to as the Social Security tax, is calculated as a set percentage of a worker’s income. For employees, the amounts calculated are taken from each paycheck. For self-employed people, they’re included in quarterly tax payments.
Social Security tax rates are determined by law and apply to both employees and employers. Employees and employers each pay a Social Security tax rate of 6.2% of employee compensation for a total of 12.4% in 2024. Those who are self-employed are responsible for the full 12.4%.
The combined taxes withheld for Social Security and Medicare are referred to as Federal Insurance Contributions Act (FICA) taxes. On your pay stub, OASDI refers to the Social Security tax, and Fed Med/EE refers to the Medicare tax.
Key Takeaways
- The Social Security tax rate for employees and employers is 6.2% of employee compensation each for a total of 12.4%.
- The Social Security tax rate for those who are self-employed is 12.4%. Self-employed people must pay both halves.
- There’s a limit, or tax cap, on the amount of earned income that’s subject to taxation.
- The maximum amount of income that’s subject to the Social Security tax is $168,600 in 2024.
How Social Security Works
Social Security is a government program that provides benefits to retirees and those who are otherwise unable to work due to disability. It is funded through a withholding tax that deducts a set percentage of income from each worker’s paycheck. Workers who contribute for at least 10 years are eligible to collect benefits based on their earnings history when they reach retirement age or if they have a disability.
Social Security benefits are limited to a maximum monthly benefit amount that’s based on the individual’s earnings history. There’s also a limit (a tax cap) on the amount of earned income that’s subject to this taxation.
Wages Subject to Taxation
The maximum amount of income subject to the OASDI tax is $168,600 in 2024, capping the maximum annual employee contribution at $10,453.20. The amount is set by Congress and can change from year to year.
The wage limit is inflation-indexed annually and can be found in IRS Publication 15 for most employees and in Publication 51 for agricultural workers. Wages include salaries, bonuses, commissions, and paid vacation or sick time. Elective contributions to a qualified retirement plan are also subject to FICA tax.
Wages Not Subject to Taxation
Employer-paid accident or health insurance premiums for an employee and the employee’s spouse and dependents are not wages and they’re not included in FICA. Health Savings Account (HSA) contributions made by the employer are also not considered wages.
Take, for example, an individual who earns $30,000 per year. They decide to contribute $4,000 to their 401(k) plan. Their employer matches 5% of that, or $200. As far as Social Security is concerned, the individual’s income is $30,000 because their elective deferral contribution is subject to the tax. The additional $200 contributed by the employer is not. The Social Security tax withheld from their pay is $1,860 ($30,000 x .062).
Tax Overpayments
An individual may pay more tax than is required if they earn more than the Social Security tax cap when earnings from more than one employer are added together. Any overpayment amount is applied to the individual’s federal tax bill or is refunded. Each employer must still match the tax contribution but they don’t receive a refund even if they become aware of the overpayment.
Calculating Social Security Taxes
Let’s say you earn $165,240 per year or $13,770 per month. The maximum in wages that can be taxed for Social Security is $168,600 in 2024 or $14,050 per month. You can therefore expect to see taxes withheld by your employer in the amount of $853.74 per month ($13,770 x .062) because your entire employee income falls under the $14,050 per month cap.
Bear in mind that if you’re self-employed, you’re considered to be both the employer and the employee for tax purposes. You’re responsible for two 6.2% contributions, for the full 12.4% tax rate. A self-employed person with the same salary would pay $1,707.48 per month for Social Security ($13,770 x .124).
Note
Former President Trump signed a $2 trillion COVID-19 emergency stimulus package called the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27, 2020. It allowed employers to defer Social Security payroll taxes through December 31, 2020. Half of the deferred amount was due on December 31, 2021, and the other half was due on December 31, 2022. This law applied to self-employed people, as well.
History of Social Security Tax Rates
The Social Security program was established in 1935. The payroll tax began in January 1937. The employee rate was 1% at that time. It has steadily risen over the years, reaching 3% in 1960 and 5% in 1978. The employee portion increased from 6.06% to 6.2% in 1990 and has held steady at that rate ever since except in 2011 and 2012.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the employee contribution percentage to 4.2% in those years. Employers were still required to pay the full tax rate for their contributions.
Tax Cap Changes
The wage tax cap has existed since the inception of the program. It remained at $3,000 until the Social Security Amendments Act of 1950 raised it to $3,600 with expanded benefits and coverage. Additional increases to the tax cap in 1955, 1959, and 1965 were designed to address the difference in benefits between low-wage and high-wage earners.
The Social Security tax policy in the 1970s involved several proposed amendments and re-evaluations. The Nixon Administration argued that tax cap increases were necessary to correlate with changes in the national average wage index to address benefit levels for individuals in different tax brackets.
The 1972 Social Security Amendments Act were revamped due to problems with the benefits formula that caused financing concerns. A 1977 amendment resolved the financial shortfall and established a tax cap increase structure that correlated with average wage increases.
In addition to keeping up with average wage increases, the Social Security tax cap has also been increased to improve financing within the system and to provide reasonable benefit amounts for those who earn higher-than-average wages.
Worries About Program Insolvency
A common worry is that Social Security could become insolvent due to longer life expectancies and a shrinking worker-to-retiree ratio. Analysts sometimes suggest raising the Social Security tax as a way to keep the program adequately funded but most politicians are hesitant to endorse this position because of overwhelming public sentiment against it.
A Regressive Tax
A common complaint about the Social Security tax is that it is regressive. Due to the tax cap, a person earning a relatively small amount of money sees a higher percentage of their total income go to this tax compared to someone who earns a higher wage.
An individual who earns under $168,600 in 2024 pays a 6.2% Social Security tax rate on their entire income. Someone who earns $200,000 per year pays that same percentage on just the first $168,600 of their income. The additional $31,400 over and above the $168,600 cap is effectively FICA tax-free.
Important
If you have to pay taxes on your Social Security benefits, you can either make quarterly estimated tax payments to the IRS or elect to have federal taxes withheld from your benefits.
Taxes on Social Security Benefits
Not all taxpayers are required to pay federal income taxes on their Social Security benefits. Only those whose income and/or benefits exceed certain limits are required to do so.
What is taxable is based on the total of your adjusted gross income plus half of your Social Security benefits. You’ll have to pay income tax on a portion of your benefits if half of your benefits plus your earned income exceeds $25,000 a year if you’re single or $32,000 a year if you’re married and filing jointly.
If you file your federal income taxes as a single person and your combined income is below $25,000, your Social Security benefits are tax-free. If you’re single and your combined income is between $25,000 and $34,000, half of your benefits are taxable. If you’re single and your combined income is more than $34,000, you must pay income tax on 85% of your benefits.
If you’re married and file a joint return and you and your spouse have a combined income that’s less than $32,000, your Social Security income is tax-free. If you’re married and your combined income is between $32,000 and $44,000, you must pay income tax on half of your benefits. If you’re married and your combined income is more than $44,000, you must pay income tax on 85% of your benefits.
You should receive Form SSA-1099 from the Social Security Administration in January detailing the financial benefits you received in the previous year. Use this information when you’re working on your tax return to determine if your benefits are subject to tax.
What Is the Social Security Withholding Rate for Employees in 2024?
The Social Security withholding rate continues to be 6.2% for employees in 2024.
Is OASDI the Same As Social Security?
The federal OASDI program is the official name for Social Security. OASDI is an acronym for Old Age, Survivors, and Disability Insurance.
Can My Social Security Benefits Grow?
Yes, if you delay taking benefits. For example, workers with the maximum taxable earnings who retire at age 66 will receive $3,652 per month in 2024. They’ll receive $4,873 per month if they’re 70. The benefits increase by 8% every year from age 62 to 70. There is no incentive to delay past age 70.
How Much Tax Will Be Withheld From My Social Security Check?
The amount of taxes, if any, that are withheld from your Social Security check depends on your total income, which includes your Social Security benefits.
The Bottom Line
The Social Security (OASDI) tax is 6.2% each for employees and employers, for a total of 12.4%. You pay the entire 12.4% if you’re self-employed.
Income over a certain threshold is not subject to Social Security tax. That threshold is $168,600 in 2024.
Read the original article on Investopedia.