Social Security Tax
In much of the developed world, social security taxes are part and parcel of tax systems, with such taxes supporting safety net and retirement programs. In the United States, the same is true — social security taxes are an important funding stream for one of the world’s most generous retirement systems. With that said, it is important for people who live and work in the US to understand social security taxes, and how their pocketbooks are affected by these taxes.
Understanding the purpose of social security taxes is the first step towards understanding their shape and structure. After all, it is in part because these taxes fund the federal government’s social security programs that they take the shape they do. Put simply, the 2017 Social Security tax rate is 6.2%, so a worker’s salary is automatically deducted 6.2%. Of that 6.2%, the employer pays 5.3%, and the employee pays the remaining 0.9%.
However, it is important to understand that there is a cap on how much money is subject to this 6.2%. In 2017, when it comes to social security taxes, only the first $127,200 in earned income is subject to this rate. In this way, people who are particularly productive and successful financially can still keep more of their earned income rather than letting it be eaten up by a relatively high rate.
Under the 2017 rules, being self-employed can actually result in a higher social security tax rate than being an employee, even when the cap on this type of taxation is taken into account. Self-employed individuals are both the employer and the employee, so they are subject to both the employer and employee rates — 7.65% in total — when they file their quarterly returns. This means that only 92.35% of their earned income is subjected to this tax rate.
However, it is important to stress that self-employed individuals derive some benefits from this situation, as well. Notably, self-employed people can actually take a tax credit on their social security contributions that is worth up to 50% of the tax rate in question. This means that these individuals can reduce their total tax burden by taking advantage of this credit.
Finally, it is important to note that social security contributions are not just taken from people’s pre-tax incomes — that is, income that has yet to be taxed by the government. Social security tax is taken from post-tax income, too. The reason for this is simple: The government wants to ensure that its social security funds always remain full, and it accomplish this goal in part by taking money from post-tax income.
All in all, social security taxes are an important part of Americans’ financial lives, and the system in place is meant to ensure that there always sufficient funds to support the federal government’s social security entitlements. It is important for people to understand this system and how their finances are affected by it. As has been noted above, the system is, to an extent, rigged in favor of those who are most productive and successful financially. However, even self-employed individuals can receive certain benefits, depending on their particular circumstances.
