Define Social Security Tax

The Social Security tax, also known as the old age, survivors and disability insurance (OASDI tax), is a payroll tax imposed by the federal government. The revenues from Social Security tax go toward paying the benefits to retirees and disabled individuals.

Function

The Social Security tax applies only to earned income, such as wages, tips or self-employment earnings.

Size

As of 2010, the Social Security tax rate was 12.4 percent and had not changed since 1990. If you work as an employee, you split this tax with your employer so each party pays 6.2 percent.

Limits

The Social Security tax applies only to a limited amount of earned income per year. This amount adjust for inflation on an annual basis. As of 2010, the Social Security tax applied only to the first $106,800 of your income.

Significance

When you pay Social Security taxes, you earn work credits that qualify you for retirement benefits. As of 2010, you could earn up to four credits per year and you needed at least 40 credits to be eligible for benefits.

History

The Social Security tax was first imposed in 1937. The original rate was 1 percent. Self-employment earnings were not taxed until 1951.

References

• Social Security Administration: FICA and SECA Tax Rates
• Money Zine: FICA Tax
• Social Security Administration: 2010 Update

Resources

• IRS: What is Earned Income?