Wages Subject to Social Security Tax
Social Security taxes are imposed by the federal government to cover the costs of providing benefits to retirees, survivors and the disabled. However, not all wages are subject to the Social Security tax.
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Function
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Social Security taxes only apply to earned income, which is money you make by working for someone or working for a business you own. Social Security taxes do not apply to unearned income such as pensions, dividends or interest.
Limits
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The Social Security tax may not apply to all of your earned income if your earnings exceed the Social Security tax limit. As of 2010, the Social Security tax only applies to the first $106,800 of your income.
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Considerations
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If you have both self-employment income and employee income and the total exceeds the limit, you pay the Social Security tax on your employee income first. For example, if in 2010 you have $90,000 in employee income and $50,000 in self-employment income, you would pay Social Security taxes on the $90,000 of employee income and the Social Security portion of the self-employment tax on only $16,800 of your self-employment income.
Significance
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By paying Social Security taxes, you earn work credits that will make you eligible for Social Security benefits when you retire. As of 2010, you can earn up to four credits per year and need at least 40 credits to receive retirement benefits.
Size
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As of 2010, the Social Security tax rate equals 12.4 percent and has not changed since 1990. If you work for an employer, you split the tax so each party pays 6.2 percent. If you are self-employed, you must pay the entire amount yourself.
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