Workers and employers pay for Social Security. Workers pay 6.2 percent of their earnings up to a cap, which is $113,700 a year in 2013. (The cap on taxable earnings usually rises each year with average wages.) Employers pay a matching amount for a combined contribution of 12.4 percent of earnings. Self-employed persons pay both the employee and employer share for a total 12.4 percent. (Half of this contribution, the employer share, is a deductible business expense for income tax purposes.) Also, higher-income Social Security beneficiaries pay federal income taxes on their benefit income, and these taxes help pay for Social Security.
During 2011 and 2012, the premiums that workers pay for Social Security protection were temporarily reduced from 6.2 percent to 4.2 percent. The lost revenue from this “payroll tax holiday”—$103 billion in 2011 and $114 billion in 2012—was made up from the government's general fund.
In 2013 the average worker makes $44,826 a year, according to the Social Security Administration. This worker and his or her employer will each pay $2,779 this year. Approximately 6 percent of all workers will earn more than the $113,700 tax cap. Earnings above the cap now account for 17 percent of the aggregate pay of all workers who pay into Social Security.
An additional tax on workers' earnings pays for Medicare hospital insurance. This is a 1.45 percent levy, paid by workers and employers each on all wages, for a total tax of 2.9 percent. Self-employed persons pay 2.9 percent.
Examples: Jon Smith makes $50,000 in 2013, and Jane Doe makes $120,000 for the year. Jon pays $3,100 for Social Security (6.2 percent of $50,000) and $725 for Medicare (1.45 percent of $50,000) for a total of $3,825 for the year. His employer pays an identical amount. Jane pays $7,049 for Social Security (6.2 percent of the 2013 maximum wage base of $113,700) and $1,740 for Medicare (1.45 percent of $120,000 salary), for a total of $8,789 for 2013. Her employer pays the same.
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* The views of NASI members are their own and not an official position of the National Academy of Social Insurance or its funders.