What is the Social Security Tax?

The Social Security tax is like a compulsory collective savings account…

Everyone pays a Social Security tax to fund the Social Security program. Then, when an individual retires or becomes disabled, they are paid a monthly check out of the savings account.

Virtually everyone who is earning a paycheck has to pay Social Security taxes. The Social Security tax is a payroll tax, and the tax is taken out of your paycheck before it even gets to you (unless you’re self-employed). Your employer withholds the necessary amount on your behalf and is responsible for sending the money to the government.

The Social Security tax is split into two parts. The employee pays half of the tax, and their employer pays the other half. The tax works a little differently for self-employed individuals. Since they are both the employer and the employee in their business, they are responsible for paying 100% of their Social Security tax, meaning they are paying twice as much as most workers.

So, let’s say Steve and Megan both make the same amount of money — about $50,000 per year. Steve works for an employer who pays half of his Social Security tax. Steve’s annual Social Security tax comes to $3,100 (6.2% of his salary). Steve’s employer also pays $3,100 in Social Security taxes on his behalf. Megan is self-employed, meaning she doesn’t have an employer to pay half of the tax bill. When it comes time for Megan to pay her taxes, she must pay $6,200 per year in Social Security taxes, which is 12.4% of her income.

The current Social Security tax rate is 12.4%, which breaks down to 6.2% for employees and 6.2% for employers. Self-employed workers have to pay the full 12.4%. This tax rate has slowly increased since the tax was first collected in 1937. At the program’s inception, the tax was just 1%. The last increase took place at the end of 1989 when the tax increased from 6.06% for both employees and employers to the current 6.2% each (12.4% total).

Depending on your income, you might not have to pay Social Security taxes on all of your earnings. In 2023, only the first $160,200 of your income is subject to Social Security taxes (up from $147,000 in 2022). In 2023, the most that an employee would contribute in a single tax year is $9,932.40, which is matched by their employer’s contribution of the same amount.

The Social Security tax is mandatory for almost all employees, employers, and self-employed people. However, there are a few exceptions that would allow someone to opt-out. Here are the qualifications that might enable someone to opt-out of paying Social Security taxes:

• Some religious group members: Some religious groups (for example, the Amish) generally oppose receiving Social Security benefits. Members of those groups can apply for an exemption to opt-out of paying Social Security taxes.
• Some nonresident aliens: Most nonresident aliens have to pay Social Security taxes, but there are some cases where you might be able to opt-out, such as if you are a foreign student who is in the country temporarily.
• Temporary students: Students might be able to opt-out of paying Social Security taxes on the income they make working for the school in which they are enrolled.
• Foreign government employees: Foreign government employees might be able to opt-out of paying Social Security taxes on income they earn through their official duties.

It’s important to note that if you opt-out of paying Social Security taxes, you won’t be able to collect Social Security benefits in retirement or if you become disabled.

The money you pay in Social Security taxes goes to fund the Old Age, Survivors, and Disability Insurance (OASDI). This program, created in 1935 and signed into law by Franklin D. Roosevelt, provides income for retired and disabled individuals to replace the income they would make at a job. There are three primary ways that someone might be able to receive income from the Social Security program.

One way to be eligible to receive full Social Security benefits is by meeting the age and work requirements. Once someone has reached the age of 66, they could be eligible to receive Social Security retirement benefits. There’s a catch, though –- You have to have at least 40 work credits, which amounts to about 10 years of work for most people.

While the full retirement age (and the age to collect your full Social Security benefits) is 66 years of age (being slowly raised to 67), you can actually start receiving benefits earlier. You can begin collecting benefits at 62 years of age. Be careful though, your monthly payments will be reduced — and that lower monthly payment will stick for the duration of your time drawing from Social Security.

You can also wait to start receiving benefits until the age of 70. If you do this, your monthly payment will increase even more, and you’ll be able to stay at that higher monthly income permanently.

The amount of monthly benefits you’ll receive from Social Security is based on your 35 highest-paid years in the workforce, indexed for inflation.

The maximum an individual can receive from the Social Security program is $3,345 per month, assuming they retired at the full retirement age. Most people don’t earn that much, though. In fact, the average monthly benefit was $1,565 in 2021.

For many people, that will be lower than their earnings while they were in the workforce. That’s why the IRS created other investment vehicles like 401(k) plans and Individual Retirement Accounts (IRA) to help you save for retirement on your own.

The next situation in which someone might be eligible to receive Social Security benefits is if they have a disability. To be eligible for these benefits, someone still must have worked for a certain number of years in the workforce where they paid Social Security taxes. You also have to suffer from a medical condition that meets the Social Security disability requirements.

In general, you aren’t eligible for benefits if you are able to work and earn more than $1,220 per month. It’s also necessary that your medical condition prevents you from doing basic work for at least one year. If the Social Security Administration (SSA) finds that you are capable of basic tasks and could be earning an income through work, then your application might be denied.

There are also certain medical conditions that automatically qualify you for Social Security disability benefits. The SSA refers to these conditions as “compassionate allowances.” They include certain cancers and brain disorders whose symptoms would almost certainly allow an individual to be eligible for disability benefits.

The average monthly benefit for individuals receiving Social Security disability benefits was $1,277 in 2021.

In certain situations, an individual might be eligible to receive Social Security benefits if they are the surviving family member of an individual who was receiving Social Security benefits and passed away.

Those who might be eligible for survivor Social Security benefits include:

A surviving widow or widower who is 60 years of age or older

A surviving spouse of any age who is caring for a child who is either disabled or under the age of 16

An unmarried surviving child who is under the age of 18, or over the age of 18 with a disability

Surviving parents who were financially dependent on the deceased

A surviving divorced spouse, in some cases

The circumstances for survivor benefits under the Social Security program vary widely on a case-by-case basis. Therefore, unlike other types of Social Security benefits, applicants cannot apply online and must speak directly with a Social Security Administration employee.