Social Security For Dummies
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Copyright © 2012 AARP. All rights reserved.

Social Security is paid for through taxes. (No surprise there.) But you’re not the only one paying into the Social Security pot: Your employer also pays a portion of your Social Security tax. All that money that’s taken out of your paycheck today goes to pay the benefits for today’s retirees.

If you’re a wage earner, you pay into the Social Security system straight out of your paycheck. This payroll tax is dubbed “FICA,” which stands for the Federal Insurance Contributions Act. The Social Security portion of your payroll tax is typically 6.2 percent of earnings up to a certain amount, which is adjusted annually (in 2012, the cap was set at $110,100). Employers also pay 6.2 percent for each employee. In addition, workers and their employers each pay 1.45 percent of all earnings for Medicare’s Hospital Insurance Trust Fund.

If you’re self-employed, you’re on the hook for both the employee and employer share, which usually adds up to 12.4 percent for Social Security and 2.9 percent for Medicare. This tax is dubbed “SECA,” for the Self-Employed Contributions Act.

In recent years, politicians have been increasingly willing to ease the payroll tax burden in response to economic conditions. In 2011, for example, Congress approved a “payroll tax holiday” to boost the economy; it lowered the worker’s tax rate to 4.2 percent instead of the usual 6.2 percent. Employers still paid the usual 6.2 percent. The self-employed paid an overall rate of 10.4 percent. (In early 2012, politicians extended the payroll tax holiday through the end of the year.)

Most workers pay Social Security taxes on all their earnings, because most workers don’t earn above the cap for Social Security payroll taxes. Well more than half — maybe three-quarters — of U.S. households pay more in Social Security taxes than in federal income taxes. Although no one enjoys paying taxes, people tend to accept the Social Security tax because it enables them to earn important benefits.

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