Social security tax guide

The General Federal program or social security Program is a program of insurance for old age, loss of a breadwinner, and disability. The General Federal program is the only, although the largest pension program that has a distributive nature. All other pension programs, both public and private, act as accumulative systems.

The General Federal program was introduced by the law on social security and adopted in August 1935 by President F. Roosevelt. After the Second World War, and especially recently, OFP changed very quickly. From 1950 to 2000, payments under the program increased from $1 billion to $407 billion., and in 2011, they reached $873 billion. The number of recipients of pensions and other benefits for 1950-2011 increased from 3.5 million to 60 million people. 

The program is financed by social tax revenues, which are credited to state insurance funds, whose budgets are included in the report on the execution of the Federal budget of the United States:

  1. old age and loss of breadwinner fund (pension fund);
  2. disability fund;
  3. the health insurance fund (from which the Medicare program is funded).

Each fund is assigned its tax rate, which together makes up a single social tax rate. Social tax (which goes to the pension fund and disability fund) is collected until the salary reaches a certain limit, which is called the “maximum tax base”. All that is above is not taxed. Such restrictions do not apply to the tax base from which the tax received by the Medicare program. It is charged from the full amount of earnings.

Mandatory contributions to the social insurance fund ensure the functioning of two social systems:

  1. The federal age pension system
  2. Unemployment insurance system.

The social security tax is deducted as a percentage of the employee’s gross income.

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What is a social security tax? Explanation 

The social security tax rate is constantly increasing. The tax is applied by the government to receive a part of all the money earned by state employees and those who are practicing self-employment on a legal basis. 

This money is used in order to pay current retirees. This kind of welfare system is called “the system pay-as-you-go.” Moreover, money from this fund is also used to provide financial support for those individual citizens who have a right to some social benefits necessary for survival. For example, if a man or a woman lost his (her) spouse, this person has a right to some additional welfare and benefits. 

The same situation is with children who have lost their parents but are not able to work independently due to young age. This kind of social security system is typical for many countries. It is interesting that only some taxpayers are obliged to pay the tax of Social Security on a regular basis. There are some exemptions for individuals and communities. 

How social security tax works

The employer and employee make equal payments to the pension fund. Contribution rates are stated by the government when forming budgets. Employee’s contribution to the social security fund is 6.2% (the maximum tax amount is $76,200).

How to calculate social security tax (formula)

The social security tax is considered not from the taxable base, but the full amount of the salary, before paying anything, and is 6,2% of the salary rate. The employer withholds the tax from the salary and also pays his part of the tax. 

Social security tax examples 

Part of the social security tax is deducted from the salary of employees, part-from employers. If a person works for an employer, they are deducted 6.2% of their gross income (salary before taxes), and the employer is deducted 6.2% of the employee’s salary from the company’s profit. The rate depends on inflation, the state of the economy, and other factors. If a person works for themselves (self-employed), they are charged 12,4% of income like Social Security Tax. Thus, there is a social security tax limit. The taxable profit is based on wage growth.

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