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How is Social Security tax calculated?

how tax calculated

The Old-Age, Survivors and Disability Insurance program. or OASDI, tax is calculated by taking a set 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. For 2015, both employees and employers must contribute 6.2% of employee compensation, for a total of 12.4%. Those who are self-employed are liable 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 disease or disability. Especially for those with modest earnings histories, Social Security often provides the only source of consistent income for people who can no longer work.

Because Social Security is a government program aimed at providing a safety net for working citizens, it is funded through a simple withholding tax that deducts a set percentage of pretax income from each paycheck. Workers who contribute for a minimum of 10 years are eligible to collect benefits based on their earnings history once they retire or suffer a disability.


Medicare's Hospital Insurance, or HI, program is another government program that provides for 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, the HI tax rate is set each year by law. For 2015, the HI 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 capped at a maximum monthly benefit amount based on earnings history. To prevent workers from paying more in taxes then they can later receive in benefits, there is a limit on the amount of annual income subject to taxation. For 2015, the maximum amount of income subject to the OASDI tax is $118,500, capping the maximum annual employee contribution at $7,347. However, no such limit applies to the Medicare HI tax.


An employee who makes $142,200 a year collects semimonthly paychecks of $5,925 before taxes and any retirement plan withholding. Though Medicare tax is due on the entire salary, only the first $118,500 is subject to the Social Security tax. Since $118,500 divided by $5,925 is 20, this threshold is reached after the 20th paycheck.

For the first 20 pay periods, therefore, the total FICA tax withholding is equal to ($5,925 * 6.2%) + ($5,925 * 1.45%), or $453.26. Only the Medicare HI tax is applicable to the remaining four pay periods, so the withholding is reduced to $5,925 * 1.45%, or $85.91. In total, the employee pays $7,347 to Social Security and $2,062 to Medicare each year. Though it does not affect the employee's take-home pay, the employer must contribute the same amount to both programs.


As mentioned above, those who are self-employed are considered both the employer and the employee for tax purposes, meaning they are liable for both contributions. In the example above, a self-employed person with the same salary pays $14,694 to Social Security and $4,124 to Medicare.

Category: Taxes

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