Social Security Tax
A payroll tax of 6.2% on wages up to the annual wage base ($176,100 in 2025) that funds the Social Security retirement and disability program.
How It Works
Social Security tax is one half of FICA, the payroll tax system that funds Social Security and Medicare. Employees pay 6.2% of wages up to the Social Security wage base, which is $176,100 for 2025. Employers pay a matching 6.2%, for a total of 12.4%. Wages above the cap are exempt from Social Security tax, making it a regressive tax — lower-income workers pay the tax on all their earnings, while high earners pay it on only a portion. The wage base increases annually based on the national average wage index. Self-employed individuals pay both halves through the self-employment tax (12.4%), though they can deduct half of the SE tax from their adjusted gross income. Social Security benefits at retirement are calculated based on your 35 highest-earning years of covered wages. Each year of covered wages contributes to your future benefit, which makes paying Social Security tax an investment in your retirement income. However, the benefit formula is progressive — it replaces a higher percentage of income for lower earners. Whether Social Security benefits themselves are taxable depends on your combined income. Up to 85% of benefits can be taxed if your combined income exceeds $44,000 for married couples or $34,000 for single filers. Strategies to minimize tax on benefits in retirement include managing withdrawal sequences and Roth conversions.
Related Terms
FICA (Federal Insurance Contributions Act)
The combined payroll tax of 7.65% (6.2% Social Security + 1.45% Medicare) that funds Social Security and Medicare programs.
Medicare Tax
A payroll tax of 1.45% on all wages with no income cap, plus an additional 0.9% on wages above $200,000 for single filers.
Self-Employment Tax
The 15.3% tax on net self-employment earnings that covers both the employee and employer portions of Social Security (12.4%) and Medicare (2.9%).
W-2 vs. 1099
The two primary employment classifications for tax purposes: W-2 employees have taxes withheld by employers, while 1099 independent contractors pay their own taxes including self-employment tax.