Social Security Tax

Social security tax (also called old age, survivors and disability insurance (OASDI) tax) is payroll tax charged in US to fund the social security benefits system. For 2018, the tax rate 12.4% on the maximum of actual salary or $128,400 half of which is deducted from employees and half is paid by employer.

It is one of the two components of the Federal Insurance Contribution Act (FICA) taxes, the other being the Medicare tax which is charged on total taxable income at the rate of 2.9% shared equally by employees and employers. The social security tax is applicable only to the first $128,400 of the annual taxable income. This cap is called the contributions and benefits base which is adjusted annually based on the average wage index.

Social security tax is also applicable in case of self-employment in which case the whole 12.4% contribution is to be made by the self-employer because he is both the employee and the employer.

Formula

The following formulas can be used to work out the monthly social security tax deduction from employees

$$ SST\ deduction\left(2018\right)=MAX\left(ME,10,700\right)\times6.2\% $$

Where ME is the actual monthly earnings of the employee.

Since the employers are required to match the deduction from employees, their associated payroll tax expense borne by the employer is the same as the employee contribution.

Example

Work out the social security tax deductions and associated employer contribution in case of Company A which has three employees: Mark earnings $150,000, John earnings $128,400 and Cook earnings $100,000 per annum.

The following table shows the required calculation:

Employee Monthly Earnings (ME) Compensation and Benefits Base (CBE) Maximum of ME and CBE Employee Deduction Employer Contribution
Mark 12,500 10,700 12,500 775 775
John 10,700 10,700 10,700 663 663
Cook 8,333 10,700 10,700 663 663

The employer will deduct an amount of $2,102 (=$775 + $663 + $663) from the gross salaries of its employees each month and match it with $2,102 out of its own pocket.

You can see that the income higher than $128,400 is not taxed because $128,400 is the maximum limit.

What if Mark is engaged in self-employment earning $150,000 per annum. He will be required to pay the whole 12.4% at the base wage of $128,400.

Written by Obaidullah Jan, ACA, CFA and last modified on