Social Security taxes are calculated in a different manner than federal and state income taxes. In some ways, the process is much less complicated -- for example, there are no Social Security tax "brackets" -- just one rate. However, Social Security tax does not apply to all types of income, and is calculated differently for self-employed individuals. With that in mind, here's how you can calculate your Social Security taxes and what to do if you paid too much.
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The Social Security tax rate
Here's the easy part. The Social Security tax rate in the United States is currently 12.4%, but only half of this amount is paid by employees, with the other half paid by the employer. If you're self-employed, you are considered to be both the employer and employee, so you pay the entire Social Security tax as part of your self-employment tax.
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In a nutshell, one (or both) of two Social Security tax rates applies to you:
- 6.2% if you're an employee
- 12.4% if you're self-employed
If some of your income comes from an employer, and you also have some self-employment income, you will pay the corresponding rates on each type of income.
How much of your income is subject to Social Security taxes?
Here's where it gets a little trickier -- not all income is subject to Social Security tax.
For 2017, Social Security tax is only applied to the first $127,200 of income per person, and this limit applies to both employees and self-employed individuals. Note that this is a per-person limit, not per job. If you earn $120,000 from your primary job and an additional $20,000 from a side job, only $7,200 of the side job income will be subject to Social Security taxes.
Furthermore, only "earned" income is considered. Dividend income, for example, is not subject to Social Security tax, and the same goes for other passive sources of income. The only types of income subject to Social Security tax are wages, salaries, tips, bonuses, and self-employment income that results from a business you actively participate in.
Calculating your 2017 Social Security tax
If you're an employee, the calculation is pretty simple. First, write down (or type into a calculator) the lower of your total wages or $127,200. Then, multiply this number by 6.2% (0.062) to calculate your Social Security tax.
If you're self-employed, write down the lower of your net business income (this is line 31 on IRS Schedule C) or $127,200. Multiply this amount by 12.4% to arrive at your total Social Security tax. Be aware that this is paid as part of your self-employment tax. The latter also includes Medicare taxes, which adds another 2.9% of your net business income, not subject to any income maximum, with an additional 0.9% for high earners.
Finally, if you have both employee and self-employed income to consider, subtract your employee income from $127,200. This is the maximum amount of self-employment income that can be subject to Social Security tax, so use the lower of this number or your actual net business income to calculate your self-employed Social Security tax. If your employee income is higher than $127,200, you won't owe any Social Security tax on your self-employment income.
What if you paid too much in 2016?
Since many people will be doing their 2016 tax returns in the coming weeks, it's worth mentioning the 2016 Social Security taxable wage limit and what happens if you paid too much.
The maximum amount of income that can be taxable for Social Security was $118,500 in 2016, which translates to a maximum Social Security tax of $7,347 per employee. If your employer(s) withheld too much Social Security tax from your paycheck -- which isn't uncommon for high earners with multiple jobs -- a refund of the excess can be claimed.
If the excess Social Security tax was the result of multiple employers withholding money from your paychecks, it can be claimed as a credit on your federal tax return (line 71 on Form 1040). If a single employer withheld too much, you have a couple of options. You can either ask that employer for a refund of the excess and a corrected W-2 or you can claim a refund of the excess with IRS Form 843.
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