Social Security is something that every income-earning American must pay into. The primary way that Americans contribute to the Social Security pool is through pre-tax payroll deductions. There is a maximum percentage of your income that goes toward Social Security benefits, along with limits on the amount of income that is taxable for Social Security.
You need to know what governs payroll deductions when it comes to Social Security. FICA is the Federal Insurance Contributions Act. This is the act that determines the amount of money employers are legally obligated to deduct from your paycheck at regular intervals. They do this to make the quarterly Social Security and Medicare payments that they must make to the federal government.
The FICA tax deduction is a maximum of 7.65 percent of your earnings. This payroll deduction is divided by the following: 6.2 percent goes toward Social Security, while 1.45 percent goes to Medicare premiums. This money goes into the federal pool for Social Security and Medicare. They help pay for benefits for those currently on Social Security and Medicare, and determine what your Social Security and Medicare benefits will be when you retire.
By law, employers are only required to deduct the Social Security portion of the FICA tax for the first $106,800 of income you make. Once you make that amount, the deduction disappears. However, no matter how much income you make, your employer must continue to deduct the portion designated for Medicare.
If you are self-employed, then the tax you must pay for FICA is a little different. The self-employed must pay a self-employment tax of 15.3 percent, part of which goes toward your Social Security payments. The reason that the tax is so high, as compared to the tax for those that are employed by a company, is that the company is paying roughly half of the required taxes.
Deductions For Self Employed
This is one area in which the self-employed can make up the difference. If you are self-employed, you are allowed to deduct 50 percent of the Social Security taxes that you’ve paid when you file your tax return. If you work for a company that pays half your taxes, then you cannot take this deduction.