How To Deduct Social Security Taxes

Social Security taxes are paid under the Old-Age, Survivors, and Disability Insurance program, also called OASDI. As the name implies, the program benefits the dependents of deceased employees and people with disabilities who have lost physical capacities to work. If you are an employer, it is your duty to deduct the Social Security taxes of your employees from their earnings. Here’s a guide on how to do that.

  • Find out the gross earnings of your individual employees. The Social Security taxes have to be taken from the gross income—the total income without all other deductions. Aside from the basic pay, the gross includes tips, commissions, and other salary inclusions. On the other hand, reimbursements and withholding allowances are excluded. If, however, the employee has 401k plan or other pre-tax benefits, remember to deduct these benefits first before deducting the Social Security tax.
  • Determine if any of your employees is covered by the limit. An employee whose year-to-date income has reached the limit is not a candidate for Social Security tax deduction. In 2009, the limit amounted to $106,800. The limit changes every year, so it pays to always check the IRS’ Publication 15 Circular E, which is sent to employers yearly.
  • Determine the Social Security tax. You need to calculate the gross earning with the OASDI rate. The rate currently is 12.40%. Only half of the 12.40% (6.2)%) will be deducted from the employee, because as an employer, you will shoulder the other half. To figure the Social Security tax, you need to multiply the total gross by 6.20%. The result will then be deducted from your employee’s gross.
  • Pay your portion of the tax. Always remember that you must pay half of the Social Security tax of your employees. That being the case, the amount you deduct from your employees’ salary is the same amount you will pay as Social Security tax on their behalf.
  • Add the Medicare tax. Medicare tax is allocated for the same people the Social Security tax supports, only Medicare tax is for hospitalization purposes. This tax is combined with  Social Security tax and is therefore paid at the same Social Security tax is paid. The current rate of Medicare tax is 2.90%  and is also shared with the employer. The employer and the employee therefore pay 1.45% each. In total, both of them pay 7.65% (6.20% for Social Security tax and 1.45% for Medicare tax). The 7.65% deduction is taken from the employee’s gross wage for as long as he doesn’t exceed the limit.

The case is slightly different for the self-employed individuals. Since they don’t have employers, they pay the Social Security and Medicare taxes themselves. A total percentage of 15.30% is deducted from their gross (12.40% for Social Security tax and 2.90% for Medicare tax). But unlike ordinary employees, self-employed individuals enjoy deductions from these taxes. Meaning, they can recoup half of the taxes when they file their tax return. These taxes, however, are not part of the itemized deductions. For more information on Social Security and Medicare taxes, read the Publication 15 Circular E.


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