A refresher on how exactly Social Security is funded
Social Security is primarily funded through the Federal Insurance Contributions Act (FICA) tax. Both employees and employers contribute a percentage of the employees’ wages to Social Security. Self-employed individuals pay a similar tax called the Self-Employment Contributions Act (SECA) tax.
- Employees pay 6.2% of their wages up $176,100 per year
- Employers also pay 6.2% for each employee.
- Self-employed workers pay the full 12.4% themselves
- Medicare applies to ALL earned income, with no wage limit. The taxable rate is 2.9%, divided between the employer and the employee.
- Both Social Security and Medicare make up the FICA tax portion of your paycheck.
- Income beyond $176,100 is not taxed for Social Security but is taxed for Medicare. As a result, high earners don’t contribute into the Social Security Trust Fund for the entire year. Their Social Security contributions stop once they hit the 2025 income maximum of $176,100.
As Social Security is such an integral part of retirement for millions of Americans, it is critical that we understand how it works. Only then can we focus on making the changes that will make the greatest impact.
