How to Calculate Social Security Deductions

Social Security deductions go to pay retirement benefits to individuals, to surviving spouses and children, for Social Security Disability Income (SSDI) for people who become disabled and can no longer work, and finally for Medicare health insurance. The Social Security deductions from an employee’s paycheck are matched by an equal amount paid by the employer. There are actually two Social Security taxes. One is the Social Security tax itself (for retirement and other benefits) and the other is the Medicare tax.

Determine the employee’s gross earnings. This includes regular pay, overtime, tips, commissions and any other compensation. Leave out reimbursements for business expenses. Do not subtract any withholding allowances or deductions for things like contributions to a tax-deferred retirement plan. Social Security taxes are levied on gross earnings before any deductions.

Review the employee’s year-to-date earnings. There is a cap on income subject to the Social Security tax (but not for the Medicare tax). As of 2009 the cap was $106,800. If an employee has exceeded this limit, don’t deduct any further Social Security tax (skip Step 3 and go directly to Step 4, below). The cap changes each year, so check IRS Publication 15, Circular E to find the current limit.

Calculate Social Security tax. The tax rate for Social Security is 12.40 percent of gross earnings, of which the employee pays half, or 6.20 percent. Multiply gross earnings by 6.20 percent to find the Social Security tax to be deducted from the employee’s pay.

Find the amount of Medicare tax. The employer also pays half of this tax, which is 2.90 percent of gross earnings. The tax to be deducted from the employee’s paycheck is therefore 1.45 percent of gross earnings.