How to Deduct Social Security Taxes

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There are two Social Security taxes that must be deducted from an employee’s paycheck. The Social Security tax itself pays for retirement and/or disability benefits for people who have paid into the Social Security system and to children with disabilities. Medicare taxes help pay for health care coverage for the same groups. As an employer (or if you are self-employed), you are responsible for collecting and remitting these taxes, along with your contributions to Social Security and Medicare. For detailed information, see IRS Publication 15 Circular E (see Resources below).

Compute the total gross wages of the employee for the pay period. Include regular wages, bonuses, tips and commissions. Don’t include reimbursement for business-related expenses. If the employee has a 401(k), his or her contribution to the plan is included for Social Security tax deductions.

Multiply the gross pay by 6.2 percent unless the employee’s year-to-date gross pay has passed the yearly limit to deduct Social Security taxes. Do not deduct Social Security taxes on gross wages exceeding this limit. The limit as of 2009 was $106,800 but is adjusted annually. Refer to IRS Publication 15 Circular E for the current figures.

Calculate the Medicare tax by multiplying the gross pay by 1.45 percent. Unlike the Social Security tax, there is no upper limit for the Medicare tax, so you deduct Medicare tax on all gross income.

Use your net earnings as the base figure to figure your Social Security taxes. The IRS defines net earnings for Social Security taxes as 92.35 percent of profit. The upper limit to deduct Security taxes applies. Normally, an estimate of your Social Security taxes is included with your estimated income taxes, and adjustments are made using Form 1040 Schedule SE when you file your taxes. Remember that if you are self-employed, you are responsible for both the portion a wage-earning employee pays and the amount the employer pays. Use 12.4 percent for Social Security tax and 2.9 percent for Medicare tax.

Tips & Warnings

  • As an employer, you must contribute an amount equal to the employee's contributions to Social Security taxes. The amount you are responsible for is always exactly equal to what the employee pays, so you don't have any additional calculations to do. For convenience, the Social Security and Medicare taxes are often combined into a single computation, using a percentage of 7.65 percent (15.3 percent for self-employed persons). This is allowed as long as the gross wages/earnings for the year are under the limit to deduct Social Security taxes.

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