Social Security: "The Tax"
By: Patricia T. Henssler, C.P.A.
The Henssler Financial Group Position Paper

Social Security — The Employment Tax

The Social Security Act, also called Federal Insurance Contributions Act (FICA), was signed into law by President Franklin D. Roosevelt on August 14, 1935. In addition to several provisions for general welfare, the new Act created a social insurance program designed to provide retired workers age 65 or older a continuing income after retirement.

The significance of the new social insurance program was that it sought to address the long-range problem of economic security for the aged through a contributory system in which the workers themselves contributed to their own future retirement benefit by making regular payments into a fund.

The first task was the need to register employers and workers by January 1, 1937. The Social Security Board contracted with the Post Office to distribute and collect applications and forward them to Baltimore where Social Security Numbers were registered and various employment records established. Over 30 million SSN cards were issued and numbers assigned through this early procedure. With payroll commencing after January 1, 1937 employees and employers started paying into the "Trust Fund." According to the Social Security Administration, more than $4.5 trillion has been paid into the Trust Fund and more than $4.1 trillion has been paid out in benefits.

From 1937 - 1949, employees and employers each paid in 1% of the first $3,000 of wages. From 1949 through 1974, the annual maximum taxable wage climbed from $3,000 to $13,200. The contribution percentage climbed from 1% to 4.95% for both employer and employee. To put it in perspective, from 1937 to 1949, the employee and employer each paid in $30 for the year (assuming the employee earned $3,000). By 1974 each paid in $653.40 if the employee earned the maximum $13,200. In 1975, due to legislative changes, the maximum earnings subject to social security started climbing at a very fast clip.

In 1975 - $14,100; in 1980 - $25,900; in 1985 - $39,600; in 1990 - $51,300; in 1995 - $61,200; in 2000 - $76,200; and for 2007, the first $97,500 is subject to tax. The social security tax rate has been 6.2% (each) since 1990. For 2008, if you earn $102,000 or more, you and your employer will each pay $6,324 into the fund — or $12,648 for the year.

A Medicare tax was imposed starting in 1966 at a rate of .35% from both employee and employer. Until 1990, the Medicare tax was imposed on the same wage base as social security. From 1991 - 1993, there was a different and much higher wage base on which Medicare tax was imposed. In 1993, the wage base for Medicare was repealed and is now paid on all earned income at a rate of 1.45% each. To put this into perspective, if you earned $102,000 this year, both you and your employer will pay $1,479 ($2,958 total), in addition to the social security tax, to the Medicare "pot."

Self-Employed Persons

Starting in 1951, self-employed individuals starting paying these taxes. Keep in mind that as a self-employed person you are both the employee and the employer. Initially the tax paid by the self-employed was only 50% higher than that amount paid by an employee (when 2% was withheld from an employee, the self employed person paid in 3%.) Starting in 1984, the same total tax was imposed on the self-employed as the total paid by employee and employer — 12.4% today (6.2% for employee and employer) and 2.9% for Medicare (1.45% each side).

This is the main reason we tell people "going out on their own" to be very careful when determining their hourly billing rates. As a self-employed person, you will pay 15.3% in FICA on your first $102,000 of income, and at least 10% federal and 6% state tax. You are immediately at the 31.3% tax bracket, and more likely at 48.3% (15.3% FICA, 25% federal and 6% state). This is 50% in taxes before you have the "take home pay."

How is the Tax Paid

Employers are required to withhold the social security tax and Medicare from employee's wages. They are then "matched" by the employer. They are paid to the federal government, along with any federal withholding you have requested on your W-4.

There are several methods to remit these payments depending on the size of the employer's payroll. Employers are classified as either monthly or semiweekly depositors. If during the period from July 1999 - June 2000 the employer deposited less than $50,000 in taxes, the employer is a monthly depositor. This means that the taxes must be remitted by the 15th of the following month through an authorized commercial bank.

An employer that reported more than $50,000 in employment taxes during the period of July 1999 - June 2000 must deposit taxes on a semiweekly basis. They must deposit the taxes by the Wednesday after payday if the payday falls on Wednesday, Thursday or Friday. All others must deposit the tax by Friday following the payday.

Notwithstanding these general rules, if the employer has accumulated more than $100,000 of accumulated liability during a month or semiweekly period, the funds must be deposited by the first banking day after the $100,000 threshold is reached. Employers accumulating less than $1,000 during the quarter may skip the deposits entirely and send full payment with their quarterly employment tax returns.

Certain employers must now make their deposits through electronic deposit. The employer will be notified by the first of the year, if they must deposit electronically. Once you meet these requirements, you will always pay electronically. Eventually, all employers will be required to make the payments electronically, rather than by check at the bank.

Self-employed persons calculate their "self-employment tax" based on their net earned income. It is reported on Form 1040. You are required to remit the self-employment tax with your federal income tax (generally through quarterly estimated taxes). See the related article for more information on Estimated Payments.

Employer Returns

The employer is required to file Form 941 each quarter. This return details the wages subject to tax for the quarter, as well as the amount of social security tax, Medicare tax and federal withholding collected each pay period. These returns are matched with your deposits of the tax. Failure to make timely deposits of the taxes withheld (and matched) is penalized severely. These funds are not the employer's funds — they are either the employee's requested withholding or "trust fund" taxes.

At the end of the year, the employer files W-2s with the federal government and the Social Security Administration. This recaps by person the taxes reported on the quarterly 941 forms. If you would like further information regarding this topic or any other tax related issue, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.