Nothing in life is free, and Social Security benefits are no exception to the rule. It’s nice of our government to offer retirement and disability benefits, meager as they sometimes may seem, but those Social Security checks don’t grow on money trees. They come from working people’s paychecks. We pay into the Social Security system all our working lives and then when we need it we can withdraw benefits. It’s called the Social Security tax and you’ll notice it every time you look at your paycheck. How much of your salary goes towards Social Security? Let’s take a look at the tax rate over the years.
The Social Security Tax Rate
For regularly employed people, meaning they work for someone else and get a paycheck, the social security tax rate is currently 6.2%. That much is taken out for Social Security and sent to the IRS four times a year by the employer. In addition to your percentage, your employer chips in that same amount- 6.2%- and sends it too. The employer pays half and you pay half for a total of 12.4% of your annual salary going towards Social Security benefits.
This is called the payroll tax, or sometimes it’s called the employment tax. Also paid out of the payroll is the Medicare tax, at a rate of 1.45%. This is also paid by both parties: employer and employee.
Part of this tax also goes towards DI, or Disability Insurance. This covers you if you become unable to work. It also covers individuals who were never able to work at all because of physical or mental handicaps.
Payroll tax is a result of Federal Insurance Contributions Act, which dictates that the amount you pay into the Social Security system will directly affect the amount you can withdraw later in benefits. The higher your salary the higher your benefits when you retire. FICA was instated after the Great Depression, when the country became very depressed at the notion that so many retired folks might be running around with no income. That was kind of a tax joke, please disregard!
What About Self-Employed People?
Don’t worry, they pay too. In fact, the social security tax rate for them is a stinger since they pay both the employee and the employer share. They must pay the entire 12.4% themselves. Then once you add in the Medicare portion it’s a whopping 15.3% of annual earnings. But it’s not 15.3% of the entire earnings, just of 92.35% of net earnings.
That little math equation makes the system a little more fair, when you compare it to the percentage of payroll tax paid by paycheck workers.
The social security tax of self-employed people is not part of the FICA system but rather a result of an act called the Self-Employment Contributions Act of 1954.
Does the Social Security Tax Rate Ever Change?
Not very often. For a few years the employee’s share of the payroll tax was lowered by 2%. That was in 2011 and 2012. It’s been at 6.2% since the late 1980s so don’t expect any changes anytime soon.