Social Security Taxes

Around the world, over 170 countries have social security programs that assist retired workers, people who become disabled, and people who have lost their life partners. These programs provide some measure of financial security to people who would otherwise struggle economically. In the U.S., the federal program is funded through Social Security taxes, and we’re going to explain what these are, how they’re assessed, and what they’re used for.

Social Security taxes are taxes taken from employees’ paychecks and matched by employer contributions to pay for the federal Social Security system.

These taxes are mandated by the Federal Insurance Contributions Act (FICA) and are often referred to as FICA taxes as well. FICA defines a tax for the Medicare program and for the Social Security program, also known as the Old-Age, Survivors, and Disability Insurance (OASDI) program. Employees and employers make equal contributions to Social Security that total 12.6% of each employee’s paid income. Benefits from these contributions are paid out to workers, their spouses, or their dependents. Almost all American workers, over 96%, are covered by the Social Security program and will be eligible for benefits.

Social Security tax makes up the larger part of FICA taxes, which are assessed on most employee paychecks in the US as an employment or payroll tax. The contributions taken from employee paychecks are matched by their employers, meaning that Social Security Taxes represent an extra cost that employers need to consider when budgeting for employee salaries.

It’s important to understand the difference between Social Security and employer-sponsored retirement plans like 401(k)s. Employer-sponsored plans provide individual retirement accounts for employees and both employers and employees can contribute to these accounts. When employees retire, they can start withdrawing funds (called disbursements) from these personal accounts. However, Social Security represents a general fund into which all employer and employee contributions are paid. The money in this fund is used to pay benefits to people who are retired, disabled, or surviving deceased workers. The workers who are currently paying this tax will receive benefits in the future should they enter into these circumstances.

The Social Security system is designed to collect money from all people who work and earn income and pool it to support beneficiaries. All workers who pay into the system can receive benefits later in the form of retirement income. However, the system also helps to support workers or their families when accidents or diseases affect their lives. Social Security benefits are paid to:

• Workers who retire, in the form of old-age benefits
• Spouses of workers who paid into the system should the worker die or become disabled
• Children and other dependents of workers who die or become disabled

Social Security benefits are based on how much workers earned during their careers. Those who earned more receive higher levels of benefits because they paid more into the system when they were working.

Nearly all American employees will find 6.2% of their salary withheld from their paychecks every pay period. Employers match this contribution by paying additional amounts equal to 6.2% of their employees’ pay. Together, they contribute 12.4% of all workers’ income to Social Security.

Note that Social Security taxes are taken from employees’ gross income, not just their base pay. This means that in addition to a worker’s salary or hourly wage, Social Security taxes are also taken from other types of earnings, including:

• Bonuses
• Commissions
• Allowances
• Rewards
• Fringe benefits (the fair market value of things like use of a company car or free hotel stays)

Social Security taxes even apply to the tips that some workers earn, and these tips must be reported to the employer so taxes can be correctly calculated.

Some types of income are not, however, subject to Social Security taxes. These include things like:

• health and accident insurance premiums paid by employers
• employer contributions to HSAS (health savings accounts)
• employer contributions to 401(k) retirement savings accounts

However, while personal contributions to 401(k) accounts are deducted from taxable income for income tax purposes, they are subject to Social Security taxes. Social Security taxes are only levied on earned income; however, annuities, interest, dividends, and pension payments are not taxed.

Instead of using gross earned income (which includes the above earnings), employers must use an employee’s Social Security taxable income to calculate their Social Security tax obligation.

While the Social Security tax seems straightforward, there is one more limitation to calculating it. This is the Social Security wage base limit which is the maximum amount of annual earnings that Social Security taxes can be taken from. This limit changes over time, but for the 2025 tax year, the limit is $176,100. Since an employee pays 6.2% of their earnings to Social Security up to this limit, the maximum contribution of any employee (or employer) is ($176,100 X 6.2%) $10,918.20 per year.

Employers are obligated to withhold Social Security taxes on their employees’ earnings up to this amount and also pay their own contributions for these earnings. Once the wage base limit is reached, the withholdings and employer contributions simply stop. 

As an example, let’s take Employee A, who is on an annual salary of $180,000 with no other earnings and is paid monthly. In their first 11 months of the year, they would make ($180,000 / 12) $15,000/month. Employee A would be deducted ($15,000 X 6.2%) $930/month, and their employer would contribute the same. In the 12th month, however, this contribution would be prorated. While Employee A’s salary for the 12th month would still be $15,000, they will reach the wage base limit in this month. Taking from their salary ($180,000 – $176,100 = $3,900), they would only need to pay Social Security taxes on ($15,000 – $3,900) $11,100 of their last month’s pay. This means they are deducted only ($11,100 X 6.2%) $688.20 from their last paycheck, and the employer matches this smaller contribution.

Almost all workers in the United States and all of its territories pay Social Security taxes, with very few exceptions. The following groups may be exempt from paying these taxes:

• Federal employees (non-military) hired before January 1, 1984
• Agricultural and domestic workers who earn less than the minimum thresholds
• Self-employed people who earn less than $400 annually
• Some nonresident, nonimmigrant aliens studying, teaching, or conducting research in the US temporarily
• Children under 18 employed by their parents
• Members of some religious groups who don’t believe in insurance

Self-employed people are considered both employees and employers for tax reasons. Therefore, they need to pay the total 12.4% of Social Security taxes themselves (6.2% employee and 6.2% employer contributions). Like regular employees, they pay this amount to a wage base limit of $176,100 in 2025. Rather than total earnings from employment, though, it’s assessed on their net earnings after business expenses have been deducted from gross earnings. 

However, there are two deductions that help to lower the amount of Social Security tax that self-employed people pay:

• They can deduct one-half of their Social Security taxes as well as half of their Medicare tax from their net earnings because, like other employees, Social Security tax contributions from employers don’t count as income. This means Social Security tax is only levied on (100% – 6.2% – 1.45%) 92.35% of their net earnings.
• When they file their annual Form 1040, U.S. Individual Income Tax Return, they can deduct half of the Social Security tax they paid from their gross income.

As an example, self-employed freelance graphic artist Pat takes in $150,000 in a year after business expenses. Pat would need to pay 12.4% Social Security tax on 92.35% of this income, for a bill of:

Social Security tax = 12.4% x ($150,000 X 92.35%) = 12.4% x $138,525 = $17,177.10

Pat can then claim an above-the-line deduction on half of this amount, or ($17,177.10 / 2) $8,588.22 when filing a personal income tax return.

Managing social security tax deductions as an employer can be expensive and time-consuming. When operating internationally, many companies can benefit from outsourcing this to an Employer of Record (EOR). For domestic outsourcing, a Professional Employer Organization (PEO) is often a good choice. Get in touch with us to find out more.