What it means
The tax is taken from each pay cheque by the employer, who then matches the employee's amount from company funds. The two shares together are sent to the government.
In the accounts, the employee's share is a deduction from pay and the employer's share is a payroll expense. A defining feature is the wage base limit.
Earnings above the limit in a calendar year are not subject to the tax, so high earners stop paying once they reach it. This means the tax takes a smaller share of total income from very high earners, which is why it is described as regressive at the top end.
Employers have several responsibilities. They must calculate the tax correctly each pay period, deposit it on schedule, report it to the authorities and keep records.
Errors or late payments can lead to penalties, so the payroll team needs to track each employee's year-to-date earnings against the limit. Self-employed people pay both the employee and employer portions as part of self-employment tax, although they can usually deduct part of it when calculating their income tax.
This catches many first-time freelancers by surprise because no employer is withholding on their behalf. Setting aside a portion of each payment for tax helps avoid a shortfall.
The tax is separate from the Medicare tax, which funds health insurance for older people and generally has no wage limit. Both appear on pay slips under a combined heading in many cases, and it is worth knowing which line is which.
The rate and base limit used below are for illustration, because the official figures are updated and should be checked. When budgeting, finance teams should remember that the employer's share is a real cost of hiring on top of salary.
Adding it to the cost of each new employee gives a more honest view of whether a role is affordable.
In practice
Real-world examples.
Example
A payroll specialist processes a monthly salary of $12,500 for an employee with year-to-date earnings of $140,000. Because only $10,000 remains below an illustrative wage base limit of $150,000, the tax is calculated on that amount alone. The next month the deduction stops entirely.
Example
A freelance photographer earns $60,000 from clients and no tax is withheld. At year end she calculates self-employment tax covering both the employee and employer shares. She sets aside part of each payment during the year to be ready.
Example
A start-up founder with 20 employees budgets for the employer's share of the tax as a cost of hiring. For an average salary of $70,000 the employer share is 70,000 x 0.062 = $4,340 per person. The finance team adds that to the true cost of each new hire.
Formula
Calculation
Social Security tax = Taxable wages (up to the wage base limit) x Tax rate
Suppose the rate for each of the employee and the employer is 6.2%, and the wage base limit in this illustration is $150,000. An employee earns $180,000 in the year, so only $150,000 is taxable. The employee's tax is 150,000 x 0.062 = $9,300. The employer pays a matching $9,300, so the total sent to the government is 9,300 + 9,300 = $18,600. The remaining $30,000 of wages is not subject to this tax.Case study
Seen in the real world.
Parkview Dental Group is an illustrative, fictional practice with 15 staff. When it hired two senior specialists with high salaries, the payroll clerk noticed that their Social Security deductions stopped partway through the year.
The clerk flagged it to the practice manager, who feared an error. After checking, they confirmed the system was correct: the two specialists had passed the annual wage base limit, so no further tax was due from either them or the practice for that year.
The practice manager used this to adjust cash flow forecasts, because take-home pay for the specialists rose late in the year and the practice's payroll costs fell. The illustrative lesson is that payroll costs are not spread evenly across a year for high earners. The manager now builds a monthly payroll forecast that models each employee's position against the annual limit.
Watch out
Common mistakes.
- Forgetting the employer's matching share when budgeting the cost of an employee.
- Applying the tax to all earnings, when wages above the annual limit are exempt.
- Assuming freelancers pay no Social Security tax because nothing is withheld, when they owe both shares through self-employment tax.
Questions
People also ask.
Who pays Social Security tax?
Employees and employers each pay half on wages up to the annual limit, and self-employed people pay both halves.
Is it the same as Medicare tax?
No, they are separate taxes, and Medicare tax generally has no wage limit.
Where do I find the current rate and limit?
On the website of the relevant tax authority, which publishes updated figures every year.
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