Covered Wages and Social Security Tax

Workers generally have social security tax deducted from their wages, up to an annual limit called the social security wage base. The employer pays social security tax, too, so the total amount paid into the system is twice as much as the amount you pay as an employee. If you’re self-employed, you have the dubious privilege of paying both sides of the tax: the employee side and the employer side.

Tax Rates

The amount deducted from your paycheck is 7.65% of your wages. This consists of 6.2% for social security benefits and 1.45% for Medicare benefits. The Medicare tax applies to the full amount of wages, but the social security tax applies only up to the wage base. If your earnings with a single employer exceed the wage base, you’ll see the withholding rate drop from 7.65% to 1.45% on the excess wages. There is no dollar limit on the Medicare tax.

If you work for more than one employer in the same year, each one will withhold at the higher rate until your earnings at that employer exceed the wage base. If you have excess withholding of social security tax for this reason, you can get it back in the form of a credit on your income tax return for that year.

Social Security Earnings

In the social security system, earnings are wages and net earnings from self-employment. Other types of income, such as investment income, can affect the amount of income tax you pay on social security benefits, but they are not included as part of the earnings that determine how much social security tax you pay, or the size of your social security benefit.

Social Security Wage Base

The annual limit on covered wages is called the social security wage base. It has double importance. The good news is that it limits the amount on which you have to pay social security tax each year. The bad news is that it also limits the amount of wages that go into the formula that calculates your benefit. In other words, the excess earnings won’t help you qualify for a higher benefit.

Example: Your 2009 wages are $130,000. The social security wage base for that year is $106,800, so you pay social security tax on only the first $106,800 of wages. When your retirement benefit is calculated, you’ll be treated the same as someone who had $106,800 of wages that year.

The social security wage base is adjusted each year for inflation. The following table provides the amount for recent years. A table covering earlier years is available here.