Social Security Payroll Tax Limits

Social Security tax is a type of payroll tax that employers are required to withhold from employees' wages. The employer is also responsible for paying its own portion of Social Security tax. The Federal Insurance Contributions Act authorizes the collection of Social Security tax. Unlike Medicare tax, which is deducted from all wages, Social Security has a limit.

History

• President Franklin D. Roosevelt signed the Social Security Act on August 14, 1935, according to the Social Security Administration. The act was originally called the Economic Security Act but was changed when congress considered the bill. The first Social Security tax was collected in January 1937; regular monthly benefits started in January 1940. Social Security tax funds the U.S. Old-Age, Survivors, and Disability Insurance program. Consequently, Social Security tax may show on the employee's pay stub as OASDI.

Significance

• Social Security tax is used to provide benefits to qualified individuals, such as the disabled, retirees, beneficiaries of employees who have died, and dependents of beneficiaries. According to the SSA, as of November 2010, the majority of its benefits go to approximately 36 million retirees and their families. The administration does not keep a personalized account for each Social Security taxpayer. Instead, it uses the funds received to provide funding for those currently receiving benefits.

Limits

• Employers are required to withhold a certain percentage of an employee's gross income for Social Security tax. The percentage has remained at 6.2 percent since 1990. The annual wage limit for 2009, 2010 and 2011 is $106,800. Once the employee has paid this amount for the year, the employer stops the withholding and resumes it at the start of the next year. The employer pays a matching amount of Social Security tax.

  The employer deducts Social Security tax from gross wages, unless the employee has a pretax voluntary deduction. In this case, the employer deducts the voluntary benefit before withholding the tax. IRS Circular E and the Social Security Administration's website lists the Social Security tax rates and limit for the year.

Reporting/Payment

• The employer reports and pays all Social Security tax liabilities, plus Medicare and federal income tax liabilities, together, to the IRS. Most employers are required to report taxes quarterly or annually, and to make semiweekly or monthly tax deposits. The employer reports the employee's Social Security withholding for the year to the SSA via Form W2. The Social Security Administration forwards the W2 information to the IRS.

Considerations

• Self-employed individuals pay the entire Social Security tax amount of 12.4 percent, because they do not have an employer to pay the matching amount. The annual wage limit is the same for employees and the self-employed.

  In rare cases, an employee may qualify as exempt from Social Security tax. For example, a nonresident or non-immigrant worker is exempt if she has an A-visa, D-visa, F-visa, M-visa, Q-visa, G-visa, or H-visa. Furthermore, a student employed by a school where she's also a student is exempt from Social Security tax.