The Social Security tax, officially known as the Old Age, Survivors, and Disability Insurance program tax, is deducted at a specified rate from your salary at regular intervals. Employees and businesses must pay the same amount to Social Security each year, which is set by law. In 2021 and 2022, employees and employers will pay 6.2% of salary or wages to Social Security.
This brings the total Social Security tax to 12.4%. Self-employed individuals must pay the full 12.4%. Federal Insurance Contributions Act refers to the total of Social Security and Medicare payroll taxes.
Retirees, those with disabilities, and the surviving spouses and children of dead employees can benefit from the federal government thanks to Social Security and Medicare.
The Current Tax Rates for Social Security
Retirees and people who cannot work due to illness or injury are eligible for Social Security payments. If a person is no longer able to work, Social Security may be their sole reliable source of income, especially if they have a limited work history or low wages.
It is funded by a simple withholding tax deducted at a fixed percentage of pretax income from each paycheck. Social Security is a government program that provides a safety net for working Americans.
The Evolution of The Social Security Tax
In 1937, the first people were required to pay into Social Security. The unemployment rate for workers was 1% back then. It peaked at 3% in 1960 and 5% in 1978 and has been rising. Since 1990, when it went up from 6.06 to 6.2 per cent, the employee contribution has been relatively constant, except in 2011 and 2012. 11
Employee contributions were lowered to 4.2% of salary for those years due to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, but employer contributions remained at the full 6.2%.
There has always been a maximum taxable income, and since the program's establishment in 1937, it has always been $3,000. That limit remained in place until the Social Security Amendments Act in 1950. Increases in benefits and coverage led to a bump in the minimum wage to $3,600.
Regressive Taxation
Many also feel that the Social Security tax is unfair since it takes a larger share of a person's income if they make less money. Since it is levied solely on income below a particular threshold, it is regressive. In 2021, the effective Social Security tax rate was 6.2% for those with incomes below $142,800. A millionaire pays substantially less of their income into the Social Security system.
Medicare
Hospital Insurance (HI) under Medicare is another government program that aids the needy and has a required withholding tax. In the same way, Congress determines the OASDI tax rate annually, and the legislation also establishes the HI tax rate for the upcoming year.
Self-employed individuals have a combined tax rate of 2.9% since they must pay both halves. Coronavirus Aid, Relief, and Economic Security Act, a $2 trillion emergency stimulus program, was signed into law by former President Trump on March 27, 2020.
By law, businesses can postpone paying their share of Social Security payroll taxes until the end of 2020, with half of that sum payable on December 31, 2021, and the other half on December 31, 2022.
An Example of Determining FICA Taxes
An employee making $165,240 receives $6,885 in compensation every other week before taxes and retirement plan withholdings. In 2021, Social Security tax will be withheld on the first $147,000 of your pay, while Medicare tax will be withheld from the rest. Because $21,3 is the result of dividing $147,000 by $6,885, this mark is achieved after 22 paychecks have been received. 18
As a result, $526.70 will be withheld for FICA taxes throughout the first 21 pay weeks. Just the Medicare HI tax will be deducted for the next three paychecks, bringing the total withholding down to 1.45% of $6,885 or $99.83.
What Percentage of My Social Security Income Is Taxable?
Some people are exempt from paying income tax on their Social Security checks. Federal income taxes on Social Security benefits are often only owed by people with significant additional income beyond their Social Security payments.
You can either choose to have federal taxes withdrawn from your Social Security checks or make quarterly estimated tax payments to the IRS. Your total income will determine how much your Social Security benefits are subject to taxation.
