How to Figure Social Security Tax

by W D Adkins, Demand Media

    Most working Americans must pay Social Security tax. The tax helps cover the cost of Social Security retirement payments and Medicare health insurance. Social Security programs also provide disability insurance and survivors’ benefits. If you are an employee, you pay half of the tax and your employer pays the other. However, if you are self-employed, you must pay the entire amount since your contribution isn’t being matched by an employer. This means you figure Social Security tax differently depending on your employment status.

    Items you will need

    • IRS Publication 15, Circular E

    Employees

    Step 1

    Calculate gross wages. Gross wages consist of all earnings like wages or salary, plus non-wage items like commissions and tips. Don’t include reimbursements for business expenses like a mileage allowance.

    Step 2

    Multiply gross wages by 7.65 percent to figure Social Security tax. For example, if gross wages for a pay period are $600, multiply $600 by 7.65 percent to get $45.90.

    Step 3

    Calculate only the Medicare portion of Social Security tax when year-to-date earnings exceed the annual threshold limit set by the IRS. This limit was $106,800 in 2010, but is adjusted yearly. For earnings that exceed the threshold, figure Social Security tax at 1.45 percent, which is the Medicare portion.

    Self-Employed

    Step 1

    Compute your total earnings if you are self employed. Total earnings are equal to your business revenue minus deductible business expenses.

    Step 2

    Figure net earnings. The IRS allows you to deduct one-half of your Social Security tax as a business expense. Multiply your total earnings by 92.35 percent. The result is your net earnings for Social Security tax purposes.

    Step 3

    Multiply net earnings by 15.3 percent to figure your self-employment Social Security tax.

    Step 4

    Figure only the Medicare portion of the Social Security tax for amounts over the annual threshold limit. The threshold is the same for self-employed persons as for those who work for someone else. However, the Medicare self-employment rate is 2.9 percent, so you multiply net earnings in excess of the threshold by 2.9 percent.

    About the Author

    Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.