How is the Social Security tax calculated?

The Old Age, Survivors and Disability Insurance Program, or OASDI, tax is calculated by taking a certain percentage of your income from each paycheck. More commonly called the Social Security tax, this percentage is determined by law each year and applies to employees and employers. By 2017, both employees and employers must contribute 6.2% of employee compensation, for a total of 12. 4%. Those who are self-employed are responsible for the full 12.4%.

Social Security

The Social Security program provides benefits to retirees and those who are otherwise unable to work due to illness or disability. Especially for those with modest income histories, Social Security often provides the only consistent source of income for people who can no longer work.

Because Social Security is a government program intended to provide a safety net for working citizens, it is funded through a simple withholding tax that deducts a fixed percentage of pre-tax income from each paycheck. . Workers who contribute for a minimum of 10 years are eligible to collect benefits based on their income history once they retire or become disabled.


The Medicare Hospital Insurance (HI) program is another government program that serves citizens in need and requires a mandatory withholding tax. Social Security and Medicare taxes are often combined and listed on paychecks as the FICA tax, which stands for the Federal Insurance Contribution Act.

Like the OASDI, HI’s tax rate is set each year by law. For 2017, HI’s tax rate is 1.45% for employees and employers. Those who are self-employed must pay both portions, for a total tax rate of 2. 9%.

Maximum taxable earnings

Social Security benefits are limited to a maximum monthly benefit amount based on earnings history. To prevent workers from paying more in taxes, then they can receive benefits, there is a limit on the amount of annual income subject to tax. For 2017, the maximum amount of income subject to OASDI tax is $ 127,200, limiting the maximum annual employee contribution to $ 7,886. However, this limit does not apply to the Medicare HI tax.


An employee earning $ 165,360 a year collects biweekly checks of $ 6,360 before taxes and any retirement plan withholdings. Although Medicare tax is owed on total salary, only the first $ 127,200 is subject to Social Security tax. From $ 127,200 divided by $ 6,360 is 20, this threshold is reached after the 20th salary.

For the first 20 pay periods, therefore, the total FICA tax withholding equals ($ 6,360 * 6. 2%) + ($ 6,360 * 1. 45%) or $ 486. 54 Only the Medicare HI tax is applicable to the remaining four pay periods, so the withholding is reduced to $ 6,360 * 1.45%, or $ 92. 22. In total, the employee pays $ 7,886.40 to Security Social and $ 2,397.72 to Medicare each year. Although it does not affect the employee’s take-home pay, the employer must contribute the same amount to both programs.

I work on my own accord

As mentioned above, those who are self-employed are considered both the employer and the employee for tax purposes, which means they are responsible for both contributions. In the example above, a self-employed person with the same salary pays $ 15,772.8 to Social Security and $ 4,795.44 to Medicare.