How Is Social Security Tax Calculated? (2024)

The Old Age, Survivors, and Disability Insurance (OASDI) tax, more commonly referred to as the Social Security tax, is calculated as a percentage of a worker's income. The tax is deducted from employee paychecks. For self-employed people, they're included in quarterly tax payments.

Employers pay a matching share of each employee's tax. Self-employed people pay double as both employer and employee.

Employees and employers each pay a Social Security tax rate of 6.2% of employee compensation for a total of 12.4% as of the 2024 tax year. Those who are self-employed are responsible for the full 12.4%.

How Social Security Works

The combined taxes withheld for the Social Security and Medicare programs are referred to as Federal Insurance Contributions Act (FICA) taxes. On your pay stub, OASDI refers to the Social Securitytax, and Fed Med/EE refers to the Medicare tax.

Social Security is the federal program that provides benefits to retirees and those who are unable to work due to disability. It is funded through a withholding tax that deducts a set percentage of income from each worker's paycheck. Workers who contribute for at least 10 years are eligible to collect benefits based on their earnings history when they reach retirement age or if they become disabled.

Social Security benefits are limited to a maximum monthly benefit amount that's based on the individual's earnings history. There's also a limit (a tax cap) on the amount of earned income that's subject to this taxation.

Wages Subject to Taxation

The maximum amount of income subject to the OASDI tax is $168,600 in 2024. That caps the maximum annual employee contribution at $10,453.20.

The cap is set by Congress and can be revised annually. The wage limit is inflation-indexed and can be found in IRS Publication 15 for most employees and in Publication 51 for agricultural workers.

Wages include salaries, bonuses, commissions, and paid vacation or sick time. Elective contributions to a qualified retirement plan are also subject to FICA tax.

Wages Not Subject to Taxation

Employer-paid accident or health insurance premiums for an employee and the employee's spouse and dependents are not wages and are not included in the FICA tax. Health Savings Account (HSA) contributions made by the employer are also not considered wages.

Take, for example, an individual who earns $30,000 per year and contributes $4,000 to a 401(k) plan. The employer matches 5% of that, or $200. As far as Social Security is concerned, the individual's income is $30,000 because their elective deferral contribution is subject to the tax. The additional $200 contributed by the employer is not. The Social Security tax withheld from their pay is $1,860 ($30,000 x .062).

Tax Overpayments

It's possible for an individual to overpay the tax if they have earnings from more than one employer and the combined total exceeds the cap. Any overpayment amount is applied to the individual’s federal tax bill or is refunded.

Each employer must still match the tax contribution but the money is not refunded.

Calculating Social Security Taxes

Let's say you earn $165,240 per year or $13,770 per month. The maximum in wages that can be taxed for Social Security is $168,600 in 2024 or $14,050 per month. You can therefore expect to see taxes withheld by your employer of $853.74 per month ($13,770 x .062) because your entire employee income falls under the $14,050 per month cap.

Bear in mind that if you're self-employed, you are both employer and employee for tax purposes. You're responsible for two 6.2% contributions, for the full 12.4% tax rate. A self-employed person with the same income would pay $1,707.48 per month for Social Security ($13,770 x .124).

History of Social Security Tax Rates

The Social Security program was established in 1935, with the payroll tax kicking in on Jan. 1, 1937. The employee rate was 1% at that time.

The rate has steadily risen over the years, reaching 3% in 1960 and 5% in 1978. The employee portion increased from 6.06% to 6.2% in 1990 and has held steady at that rate ever since except in 2011 and 2012.

Tax Cap Changes

The cap on the tax has been in place since the inception of the program. It remained at $3,000 until the Social Security Amendments Act of 1950 raised it to $3,600 with expanded benefits and coverage.

Additional increases to the tax cap in 1955, 1959, and 1965 were designed to address the difference in benefits between low-wage and high-wage earners.

Fiscal Worries Lead to a Higher Cap

Social Security tax policy in the 1970s involved several proposed amendments and re-evaluations of the stability of the program.

The Nixon Administration argued that tax cap increases were necessary to correlate with changes in the national average wage index.

The 1972 Social Security Amendments Act was revamped to fix problems with the benefits formula that caused financing concerns. A 1977 amendment resolved the financial shortfall and established a tax cap increase structure that correlated with average wage increases.

In addition to keeping up with average wage increases, the Social Security tax cap has also been increased to improve financing within the system and to provide reasonable benefit amounts for those who earn higher-than-average wages.

Worries About Social Security Insolvency

For decades, there have been worries that Social Security could become insolvent due to longer life expectancies and a shrinking worker-to-retiree ratio.

Analysts sometimes suggest raising the Social Security tax as a way to keep the program adequately funded but most politicians are hesitant to endorse this position because of overwhelming public sentiment against it.

A Regressive Tax

A common complaint about the Social Security tax is that it is regressive. Due to the tax cap, a person earning a relatively small paycheck pays a higher percentage of total income than a person who earns a higher wage.

An individual who earns under $168,600 in 2024 pays a 6.2% Social Security tax rate on their entire income. Someone who earns $200,000 per year pays that same percentage on just the first $168,600 of their income. The additional $31,400 over and above the $168,600 cap is effectively FICA tax-free.

Taxes on Social Security Benefits

Most Americans pay federal income taxes on part of their Social Security benefits because their total income is higher than the threshold for taxation of their benefits.

The taxable amount is based on your total adjusted gross income plus half of your Social Security benefits. You'll have to pay income tax on a portion of your benefits if half of your benefits plus your earned income exceeds $25,000 a year if you're single or $32,000 a year if you're married and filing jointly.

Income Thresholds

If you file your federal income taxes as a single person and your combined income is below $25,000, your Social Security benefits are tax-free. If you're single and your combined income is between $25,000 and $34,000, half of your benefits are taxable. If you're single and your combined income is more than $34,000, you must pay income tax on 85% of your benefits.

If you're married and file a joint return and you and your spouse have acombined incomethat's less than $32,000, your Social Security income is tax-free. If you're married and your combined income is between $32,000 and $44,000, you must pay income tax on half of your benefits. If you're married and your combined income is more than $44,000, you must pay income tax on 85% of your benefits.

You should receive Form SSA-1099 from the Social Security Administration every January detailing the financial benefits you received in the previous year. Use this information when you're working on your tax return to determine if your benefits are subject to tax.

The Bottom Line

The Social Security (OASDI) tax is 6.2% each for employees and employers, for a total of 12.4%. You pay the entire 12.4% if you're self-employed.

Income over a certain threshold is not subject to Social Security tax. That threshold is $168,600 in 2024.