Social Security is one of those programs that a lot of people sadly depend on for income in their retirement years. This program is funded by the social security tax that working Americans and their employers pay. But how much is the social security tax?
The Social Security Tax
Social Security taxes come directly out of payroll checks and are taken out of the gross income amounts. These taxes are used to help fund a social insurance program for the elderly. Social Security participants can start taking benefits at the age of 62 at a reduced rate or wait until a later age to receive their full benefit amount. Benefit payouts are based on the contributions that were made during the working life of the employee.
Social security contributions are funded by employers and employees. One half of the total contribution amount is paid by employers and the other half is to be paid by employees. The historical amount of the Social Security tax has been 12.4%. The difficult economic times however have led to a reduction in the amount of Social Security taxes owed. The total Social Security tax rate has been dropped to 10.4%.
The Social Security tax rate for employees is typically at 6.2% but has been dropped for 2011. Employees are only responsible for contributing 4.2%. This applies for earnings up to $106,800. The employee’s share of the Social Security tax rate has been reduced by 2% to enable them to spend it instead to help the economy. The tax amount is used to provide benefits for employees in their retirement years.
Employers are required by law to contribute to the Social Security plans of employees. The Social Security tax rate has not been dropped for employers. Employers are still responsible for paying a 6.2% tax rate on employee earnings. Employee earnings up to $106,800 are taxed at this rate. The earnings amount that is taxable by Social Security adjusts each year based on the rate of inflation.
Self Employed Social Security Taxes
Self employed individuals are responsible for paying the entire amount of the Social Security tax since they employ themselves. As stated above, this tax rate is typically 12.4%, but has been lowered to 10.4% for 2011. This is added on top of any other federal or state taxes that need to be covered based on their tax bracket.
My Experience with Social Security Taxes
When I had my day job, my part of the social security tax was taken out of my paycheck before I even had my take home pay in hand. Since I am self employed now, I am responsible for the full 10.4% currently and whatever it is raised back to after 2011. This 10.4% is on top of the federal taxes I will pay as well. I am filing a quarterly tax return for the first time this month and hope that the 33-35% I have been setting aside for taxes will be enough. Based on my rough calculations of my income and deductible expenses, I should be safe but we’ll see.
Did you know how the social security tax worked? I seem to learn more every time I’m given a topic for staff writing.