Social Security, the federal income-support program for retirees, the disabled and the survivors of deceased workers, is financed with payroll taxes on every American worker and employer. However, the amount of income subject to the tax is limited.
As of 2009, the Social Security tax was levied on the first $106,800 of a worker's income. The tax is based on gross wages--that is, wages before any other taxes or deductions.
The income limit is adjusted every year for inflation. The 2009 limit of $106,800 represents an increase of nearly 40 percent from 2000 and nearly 110 percent from 1990.
Employees--those who work for someone else--pay 6.2 percent of their gross wages in Social Security taxes. Employers pay an equal amount, so the total tax paid equals 12.4 percent of the employee's wages.
Self-employed persons are responsible for both the employee and employer portions of the tax, or 12.4 percent. However, they can deduct half this amount from their taxable income.
A similar payroll tax is levied to finance Medicare--1.45 percent each from employees and employers, or 2.9 percent for the self-employed. Unlike the Social Security tax, the Medicare tax has no income limit.
- Photo Credit Image by Flickr.com, courtesy of Balazs Gal