Paying Social Security tax is a time-honored tradition—since 1937, to be exact. Both employers and employees pay the tax. But when an employee hits the Social Security wage base, it’s game over for withholding and contributing the tax.
Although the Social Security tax rate itself generally does not change from year to year, the Social Security taxable wage base does.
Read on to learn more about Social Security tax, the withholding rate, what the wages fund, and—of course—the wage base.
Your one-minute overview of Social Security tax
Social Security tax is an employment tax employers withhold from employee wages and contribute a matching portion. Both Social Security and Medicare taxes make up the payroll tax known as FICA.
Here’s a quick recap of employment taxes and who pays what:
Federal income tax: Employee FICA tax: Employee and employer Federal unemployment tax: Employer State unemployment tax: Employer (plus employee in some states) State income tax (if applicable): Employee State-specific taxes (if applicable): Employee Local income tax (if applicable): Employee
The Social Security Act, which is the law that started the program, was signed into law in 1935. Social Security is a social insurance program. The Social Security Administration is the federal agency that administers the program.
Social Security tax rate
The Social Security tax withholding rate is 6.2%. You must withhold 6.2% from each employee’s wages. The Social Security employer contribution is also 6.2%.
Let’s say an employee receives $1,000 each paycheck. You must withhold $62 ($1,000 X 0.062) from their wages and pay an additional $62 for Social Security tax.
Again, both Social Security and Medicare make up FICA tax. Medicare tax is 1.45%. So, FICA tax is 7.65% for the employee portion and 7.65% for the employer portion (6.2% + 1.45%).
What do Social Security wages fund?
Social Security tax funds a number of things, including benefits for:
Retired workers Retired workers’ dependents Disabled workers’ dependents Survivors
According to the Social Security Administration, retired workers receive an average monthly Social Security benefit of $1,514. Disabled workers receive an average monthly benefit of $1,259.
Social Security taxes also go towards paying for the administration of the program. After paying out benefits and administration costs, there is a surplus. The federal government borrows remaining money from the Social Security fund. The government is responsible for paying interest on the borrowed funds.
Social Security wage base
Now, onto the good stuff. The Social Security withholding limit.
Only withhold and contribute Social Security taxes until an employee earns above the wage base. Stay up-to-date with the annual Social Security wage base because it generally changes each year.
The 2021 Social Security wage base is $142,800. The 2020 Social Security wage base is $137,700.
After an employee earns above the annual wage base, do not withhold money for Social Security taxes. And, don’t contribute anything else.
Not all employees will earn above the withholding limit. If an employee does not meet this wage base, continue withholding and contributing year-round.
The maximum Social Security contribution in 2021 is $8,853.60 ($142,800 X 0.062). In 2020, the contribution limit is $8,537.40 ($137,700 X 0.062). This is the maximum amount you’ll withhold and contribute for each employee. If you withhold more than $8,853.60 (2021) or $8,537.40 (2020), you accidentally surpassed the wage base and mustContinue reading