Look at your paycheck and you will see a chunk of money taken out for Social Security tax. If you're self-employed, you also pay Social Security tax. The Social Security tax is a percentage of your gross wages, so how much Social Security tax you pay depends on how much you earn.
The usual rate for Social Security tax is 6.2 percent of your gross wages, including tips, bonuses and other compensation. This means your employer withholds 6.2 percent of your gross pay before withholding allowances are subtracted. For example, if your gross pay is $500, you pay $31 in Social Security tax. In 2011 and 2012, Congress temporarily lowered the Social Security tax rate for employees to 4.2 percent. You had to pay Social Security tax on the first $110,100 of gross income as of 2012. The income limit is adjusted annually, so check with the Internal Revenue Service for the current figure.
If you own a business, you also have to pay 6.2 percent of each employee's gross income in Social Security tax. The employer share is levied on the first $110,100 an employee earns. This portion of the tax is your responsibility as a businessperson and is not deducted from the paychecks. Congress didn't lower the employer’s share of the Social Security tax for 2011 and 2012, so the rate stayed at 6.2 percent.
Medicare is administered by the Social Security Administration, so the Medicare tax is usually figured along with Social Security tax. In fact, the IRS sometimes combines these taxes for convenience. You pay 1.45 percent of your gross income in Medicare tax and your employer pays another 1.45 percent. There is no income limit for Medicare tax, so you pay it on all of your gross income.
When you earn money from self-employment, there is no employer to share the responsibility of paying Social Security and Medicare taxes. That's why you must pay the entire amount on net earnings. The Social Security tax rate for self-employment as of 2012 was 12.4 percent and had to be paid on the first $110,100 of net earnings. The self-employment Medicare tax rate was 2.9 percent in 2012.
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