Nearly all taxpaying Americans pay social security tax on their earned income. These taxes are used to fund Social Security benefits checks going out to retired Americans; eventually, when you are retired, current taxpaying workers will be funding the Social Security Trust Fund out of which your benefits checks will be issued. These taxes are deducted automatically from our paychecks, so we’re often unaware of them.
However, given continuing questions about the long-term solvency of Social Security, more taxpayers are examining their paystubs more carefully. How are Social Security taxes indeed calculated, and what is the Social Security maximum withholding?
To start with, employees must pay Social Security tax on a maximum portion of their income; as of 2012, you would pay Social Security tax only on the first $110,100 of your annual income. Of course, the average annual wage for all Americans is well under $50,000, according to 2010 statistics, so most Americans will pay Social Security tax on their entire incomes. Still, millions of higher-end wage earners will see a withholding threshold.
The actual Social Security tax is calculated at 12.4 percent of your earnings, up to $110,100. This tax is split between you and your employer. Thus, your employer withholds 6.2 percent of your earnings, and chips in the remaining 6.2 percent, sending the full payment off to the Social Security Administration (SSA). Thus, if you earn at least $110,100, your Social Security maximum withholding for the year will be 6.2 percent of $110,100, or $6,826.20. If your salary is closer to the national average, say $47,000, your annual withholding will be $2,914.
If you are self-employed, however, you face a disadvantage; you don’t have an employer to cover the additional 6.2 percent due to the SSA, so you must pay the entire 12.4 percent out of your own salary. Thus, if you pay yourself $125,000 annually, you will have to pay 12.4 percent of the threshold amount — $110,100 — or $13,652.40. Perhaps you can find some way to give yourself a raise, just to cover these taxes!
Changing jobs mid-year
And if you change jobs in mid-year, check your paystubs carefully, as each of your employees will be deducting the maximum amount from your salary to the threshold amount. If you earn $70,000 working six months at Job A, and $80,000 working six months at Job B, you still only owe Social Security tax on the annual threshold amount of $110,100. However, you won’t reach that amount at either Job A or Job B, and you may end up paying the tax on your total annual earnings of $150,000. Be sure to discuss this matter with the personnel officers at each place of employment; they may need to coordinate between each other how the taxes should best be paid.
And if you find out too late that you’ve overpaid for a year, you can claim reimbursement from the SSA when you file your personal income taxes for that year.
Social security alive and well
Despite some reports to the contrary, Social Security is likely to remain solvent for some decades to come, and despite the occasional gridlock on Capitol Hill over the issue, the program is too popular and too important among American retirees to be seriously jeopardized by irresponsible behavior on the part of lawmakers. Nevertheless, the threshold amount is adjusted annually, and the percentage of tax due on wages is also adjusted — for instance, in 2011, employees were given a 2 percent break on the tax, paying only 4.2 percent (though employers still had to contribute their full 6.2 percent share for each employee). So keep informed about the issue, scan your paystubs, and make sure you’re overpaying.