What Is Social Security Tax? Definition, Exemptions, and Example

What Is the Social Security Tax?

Social Security tax is the tax levied on employers and employees to fund the Social Security program in the U.S. The revenue is collected in the form of a payroll tax.

How the Social Security Tax Works

Social Security tax mandated by the Federal Insurance Contributions Act (FICA) or a self-employment tax mandated by the Self-Employed Contributions Act (SECA). The Social Security tax pays for the retirement, disability, and survivorship benefits that millions of Americans receive each year under the Old-Age, Survivors, and Disability Insurance (OASDI) program—the official name for Social Security.

The Social Security tax is applied to income earned by employees and self-employed taxpayers. Employers usually withhold this tax from employees’ paychecks and forward it to the government.

The funds collected from employees for Social Security are not put into a trust for the individual employee currently paying into the fund, but rather are used to pay existing older people in a "pay-as-you-go" system.

Social Security tax is also collected to support individuals who are entitled to survivorship benefits—benefits paid to a surviving spouse upon the death of a spouse or to a dependent child upon the death of a parent.

As of 2024, the Social Security tax rate is 12.4%. Half of the tax, or 6.2%, is paid by the employer, and the other 6.2% is paid by the employee. The Social Security tax rate is assessed on all types of income earned by an employee, including salaries, wages, and bonuses.

However, there is an income limit above which the tax cannot be applied. For 2023, that annual limit is $160,200. The limit for 2024 is $168,600.

Social Security Tax for the Self-Employed

Social Security tax is also applied to the net earnings of the self-employed, up to that aforementioned income limit. Since the Internal Revenue Service (IRS) considers a self-employed individual to be both an employer and an employee, they have to pay the full 12.4% Social Security tax themself.

The self-employment tax is made up of the Social Security tax and the Medicare tax. As of 2024, the self-employment tax is 15.3% (12.4% Social Security tax + 2.9% Medicare tax). The tax is only applied to 92.35% of net business earnings.

Here's an example of how it works:

Ike, who runs a human resources consulting business, calculates his total net income for 2023 to be $200,000 after business expenses have been deducted. His self-employment tax rate will be assessed on 92.35% of $200,000, or $184,700 (.9235 x $200,000).

However, since this amount is above the $160,200 income limit, his tax bill actually will be 15.3% of $160,200, or $24,510.60 (.153 x $160,200).

Ike can claim an above-the-line deduction for half of his self-employment tax, or $12,255.30 ($24,510.60 ÷ 2). In effect, he gets a partial refund on the 7.65% employer portion of his self-employment tax (6.2% Social Security + 1.45% Medicare) .

Exemptions

Not every taxpayer has to pay Social Security tax. Exemptions are available to specific groups of individuals, including:

• Members of a religious group who are opposed to receiving Social Security benefits during retirement, if disabled, or after death
• Nonresident aliens—that is, individuals who are neither citizens nor legal residents of the United States, who are in the country temporarily as students
• Nonresident aliens working in the U.S. for a foreign government
• Students who are employed at the same school where they are enrolled, and where employment is contingent upon continued enrollment

Example of Social Security Taxes

The Social Security tax is a regressive tax, meaning that a larger portion of lower-income earners' total income is withheld, compared with that of higher-income earners.

Consider two employees, Izzy and Jacob. Izzy earns $85,000 for the tax year 2023 and has the 6.2% Social Security tax withheld from his pay. The federal government collects $5,270 (.062 x $85,000) from Izzy to help pay for retirement and disability benefits.

Jacob, on the other hand, earns $175,000 for the tax year 2023. The Social Security tax rate will only be applied up to the limit of $160,200.

Therefore, Jacob will pay $9,932.40 (.062 x $160,200) as his contribution to the country’s Social Security program for older people, survivors, and people with disabilities. But his effective Social Security tax rate is 5.7% ($9,932.40 ÷ $175,000). Izzy, with a lower income per annum, is taxed at the higher 6.2% rate ($5,270 ÷ $85,000).

The Bottom Line

The Social Security tax (at a rate of 12.4% as of 2023) is applied to the earned income of Americans throughout their working years. The revenue derived from the Social Security tax funds the Old-Age, Survivors, and Disability Insurance (OASDI) program commonly known as Social Security.

The Social Security program, established in 1935, provides monthly financial benefits to workers when they reach retirement age, as well as to survivors of deceased workers (e.g., a spouse or child), and disabled workers.