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Simple English definitions for legal terms
Social Security tax
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A quick definition of Social Security tax:
Social Security tax: This is a tax on the money you earn from working. It helps pay for Social Security, which is a program that gives money to people when they retire or become disabled. The tax is 12.4% of your wages, but your employer pays half and you pay half. You only have to pay this tax on wages up to a certain amount, which changes every year. In 2021, you don't have to pay Social Security tax on wages above $142,800. This is different from Medicare taxes, which apply to all income.
A more thorough explanation:
Social Security tax is a tax on wages that helps fund the Social Security program. It is also known as FICA tax. The tax rate is 12.4% of an employee's wages, but it is split between the employee and employer, with each paying 6.2%. The tax only applies to wages up to a certain amount, called the maximum wage base, which changes every year. In 2021, the maximum wage base is $142,800. This means that any wages above $142,800 will not be subject to Social Security taxes.
Let's say that John earns $50,000 per year. His employer will deduct 6.2% from his paycheck for Social Security tax, which amounts to $3,100 per year. John's employer will also pay 6.2% of his wages, or $3,100 per year, to the Social Security program. If John earns more than $142,800 in 2021, only the first $142,800 of his wages will be subject to Social Security taxes.
Another example is if Jane is self-employed and earns $200,000 in 2021. She will have to pay the full 12.4% Social Security tax on her entire income, which amounts to $24,800.
These examples illustrate how Social Security tax works and how it is calculated based on an employee's wages or a self-employed individual's income.