The Social Security tax is one part of the Federal Insurance Contributions Act, or FICA, taxes that your employer withholds from your paycheck. The Social Security tax includes not only the portion you pay, but an additional portion your employer pays on your behalf. As of 2012, the employee portion is 4.2 percent and the employer portion is 6.2 percent. If you're self-employed, you pay both portions. However, it doesn't always apply to all of your income.
Only Earned Income
The Social Security tax applies to earned income, such as your salary or wages. It does not apply to unearned income such as investment income or retirement plan distributions. For example, if you have $90,000 in wages, $10,000 in rental income and $5,000 in capital gains and dividends, you pay the Social Security tax on the $90,000 of earned income.
The Social Security tax applies to a maximum amount of earned income each year. As of 2012, the limit is set at $110,100. Each year, the limit adjusts to account for inflation. If you have more earned income than the annual limit, you don't have to pay the Social Security tax on that portion of your income. For example, if in 2012 you have $150,100 in earned income, you have to pay the Social Security tax on the first $110,100.
Self-Employment Taxes Offset
If you work as both an employee and for yourself, you pay the Social Security tax on your employment income first. For example, assume the Social Security limit is $115,000 and you have $100,000 of wage income and $50,000 of self-employment income. You would pay the Social Security tax on the $100,000 of employment income and only the first $15,000 of self-employment income. This saves money because when you're paying the Social Security tax on self-employment income, you pay both the employee and employer shares.
If you have had too much money withheld from your paycheck for Social Security taxes, you should talk to your employer and request a refund of the excess if you only work one job. If your employer refuses, file Form 843, Claim for Refund and Request for Abatement. If you work multiple jobs, your employers may withhold too much because they are unaware of the additional withholding. For example, if your Social Security limit is $115,000 and you earn $100,000 at each of your two jobs, your employers will both withhold Social Security taxes on your entire salary. You claim a tax credit for the amount of the excess withholding on your Form 1040 tax return.
- IRS: Social Security Tax / Medicare Tax and Self-Employment
- Social Security Online: Contribution and Benefit Base
- IRS: Self-Employment Tax
- Internal Revenue Service: Publication 505 - Tax Withholding and Estimated Tax
- Social Security Administration: 2012 Social Security Tax Rate and Maximum Taxable Earnings
- tax forms image by Chad McDermott from Fotolia.com