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We all have heard about Social Security and seen it taken out of our paychecks, but what is it exactly? Read on to find out how you pay into the system, when and how Social Security is taxed, what the max Social Security limit is for 2023, and why it was put into place.
The Social Security tax is one of two taxes all employers must withhold from your pay under the Federal Insurance Contributions Act (FICA). Social Security provides retirement income and other benefits for almost every American worker. The tax was put into place after the Great Depression. President Franklin D. Roosevelt signed the Social Security Act on August 14, 1935, to provide workers income for retirement or in case of disability.
The other tax that companies must take out of your pay is Medicare.
2023 Social Security tax limit
The Social Security tax (also called OASDI or Old-Age, Survivors, and Disability Insurance) is subject to a dollar limit, which is adjusted annually for inflation.
Employers and employees pay 6.2%—for a total of 12.4%—for up to $160,200 of your wages for 2023.
Here’s an example of how Social Security tax is taken out if you made $180,000 a year:
If you make $180,000, you’d pay 6.2% of the first $160,200 of your salary.
Your company also pays 6.2% of the first $160,200 of your salary.
You do not need to pay SS tax on the remaining $19,800.
The limit on how much you pay for Social Security tax in 2023 would be $9,932 with this scenario. Once you reach that limit, your employer should stop taking out this tax from your pay.
It is the employer’s obligation to withhold the correct amount of Social Security tax from every paycheck and send it to the federal government on time. Failure to do so can result in significant penalties.
For Medicare taxes, you each pay an additional 1.45% each—for a total of 2.9%. The self-employed pay the full 12.4% (15.3% with Medicare taxes) themselves.
How are Social Security benefits calculated?
There are several timeframes and ages when you can start taking Social Security. Understanding how Social Security benefits are calculated can help you to determine when to take Social Security and how much you might receive. The Social Security tax is a percentage of gross wages that most employees, employers, and self-employed workers must pay to fund the federal program.
The minimum Social Security benefit calculation was developed to help certain low-income workers boost their benefit amount. This calculation looks at years of coverage in place of someone’s earnings to estimate how much they might receive from Social Security.
The maximum Social Security retirement benefit that you can receive depends on the age when you begin collecting and your earnings history, among other factors. The maximum in 2023 is $3,627 per month for someone who files at full retirement age at 66. The average check was $1,693.88 as of February 2023, according to the Social Security Administration.
For most people in the U.S., your Social Security benefits are calculated based on your lifetime earnings. Earnings are adjusted to account for increases or decreases in average wages from the year your earnings were received.
Next, the Social Security Administration then takes your average indexed monthly earnings for the 35 years of your work history in which you earned the most. If you have fewer than 35 years of work history, a “0” is entered in for any missing year, which brings down your overall average
Your average earnings are used to figure out your primary insurance amount (PIA) for Social Security retirement benefits. This number stands for the amount you’d receive each month from Social Security once you reach what is called “full retirement age,” which is dependent on the year you were born.
The full retirement age for people born after 1960 is 67 years old, as of 2023, though for people born before 1960 it may be a combination 66 years and some months (based on year of birth) instead, according to the Social Security Administration.
You must earn at least 40 Social Security credits to qualify for the income. These credits are earned as you work and pay Social Security taxes from your income. That includes income from working for an employer or income made through self-employment
Workers can earn up to four credits per year. For 2023, you can earn one Social Security or Medicare credit for every $1,640 in covered earnings. So, to get the maximum four credits per year allowed, you’d need to earn at least $6,560. You can check with the Social Security Administration, at ssa.gov, about your specific situation.
Who pays the Social Security tax?
Almost every worker in the U.S. pays into the Social Security system. The Social Security program provides benefits to retirees and those who are otherwise unable to work due to disease or disability. Social Security often provides the only source of consistent income for people who can no longer work—especially for those with low- to moderate-income earnings histories. It’s important to pay into the system to receive these benefits when you may be eligible.
Where is Social Security tax on a pay statement?
On your pay statement, Social Security taxes are referred to as OASDI, and Medicare is shown as Fed Med/EE. As mentioned above, these are automatic pre-tax payments from your paycheck, with a match from your employer.
Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is the Social Security and Medicare tax payments for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, any time the wording "self-employment tax" is used, it only refers to Social Security and Medicare taxes.
Social Security tax exemptions
As written above, almost everyone in the U.S. has to pay the social security tax, including resident aliens and many nonresident aliens. There are some exceptions to this rule.
For example, college students are exempt from paying FICA taxes on the wages they earn from an on-campus job.
Exemptions also apply to some nonresident aliens, including foreign government employees and teachers, who are covered under the Totalization Agreement. This agreement protects workers who may be temporarily in the U.S. from double-paying Social Security tax. There are a lot of details and nuances to this agreement, so work with your Tax Pro to find out if you’re eligible.
Certain religious groups, like the Amish, Mennonites, and others, may apply for an exemption from FICA taxes by filing IRS Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits. Because they won’t be paying FICA taxes, they waive the right to receive Social Security benefits at retirement or if they become disabled.
The religious group must have existed as of the end of 1950 and must have continuously provided its dependent members with a reasonable standard of living since that time. The exemption also isn’t open to you if you’ve ever been eligible to receive benefits under the Social Security program regardless of whether you received the benefit or not.
There is also the wage base limit, which is the maximum wage that’s subject to Social Security tax for the year. As mentioned above, it is $160,200 for 2023. Everyone’s specific situation is different, so your Tax Pro may be able to help you find out if any of these apply to you or your family.
Examples of social security benefits
In addition to retirement benefits, Social Security tax funds several other types of benefits. For example, Social Security pays benefits to disabled workers who meet medical and insured requirements. Benefits paid to disabled workers and their families may be reduced for receipt of certain public disability benefits–such as Workers' Compensation.
How to report Social Security income on your federal taxes
The net amount of Social Security benefits that you receive from the Social Security Administration is reported in Box 5 of Form SSA-1099, Social Security Benefit Statement, and you report that amount on line 6a of Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. If any of your Social Security is taxable, the amount will be reported on line 6b.
There is a lot to consider when thinking about Social Security tax. Questions? Reach out to a local Jackson Hewitt Tax Pro who can help you with understanding why and how you pay Social Security and how it may help you in years to come.
About the Author
Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.