How to Figure Social Security Taxes

Whether you are a small-business owner or self-employed, you have to know how to calculate Social Security taxes. It's not difficult, but the procedures differ depending on which category you are in. Employers are responsible for half of employee Social Security taxes, but self-employed individuals must pay the entire amount themselves. Social Security tax is actually two taxes, Social Security and Medicare tax, although they can often be lumped together for convenience.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Schedule SE, Form 1040 (self-employed) IRS Publication 15 (Circular E) (small business)

1. Add up the employee's total wages for the pay period. Don't include reimbursements for business expenses. Do include all commissions, bonuses and tips. For tipped employees, use the amount of tips declared or the minimum required by the IRS, whichever is greater (from Publication 15, Circular E). This is the employee's gross income.

2. Calculate Social Security tax on the gross income. The payroll deduction (employee contribution) is 6.2 percent of gross income. The employer adds an equal amount that is deducted from the employee's pay. If the employee's year-to-date gross income exceeds the annual cap for Social Security tax ($106,800 in 2009), do not deduct any further Social Security tax.

3. Figure Medicare tax. This is 1.45 percent of gross income. As with the Social Security tax, the employer contributes a like sum. There is no cap on Medicare tax, so continue to deduct this tax regardless of the employee's total earnings.

4. Calculate Social Security taxes for the self-employed. You will use Schedule SE, Form 1040 for this. Start by multiplying net profit by 0.9235 to get net earnings. As a self-employed person, you are responsible for the entire amount of Social Security taxes. Multiply earned income by 12.4 percent to find the Social Security tax (again, only for the first $106,800 of net earnings). For Medicare tax, multiply net earnings by 2.9 percent.

Tips & Warnings

• For convenience, as long as the year-to-date earnings are less than $106,800, you may combine the calculations into a single step. Use 7.65 percent of gross income for the employee and employer contribution, or 15.3 percent of net earnings if self-employed.

Resources

• Social Security Information