What is a Social Security Deduction?

Mary McMahon

The term “Social Security deduction” is used in two different ways. In the first sense, it can refer to the automatic deduction taken from a paycheck to pay into Social Security. In the second sense, it refers to a tax deduction which certain tax payers are entitled to take. Both senses are unique to the United States, where Social Security is used to provide benefits to older Americans and Americans with severe disabilities who cannot earn income through work.

A Social Security benefits application.
A Social Security benefits application.

In the first sense, the Social Security deduction is one of several deductions taken out of a paycheck during each pay period. In the United States, people pay their taxes ahead of time on the basis of estimated income, as this tends to increase compliance with the tax system. As of 2009, 7.65% of an employee's earnings is paid into Social Security, with an employer providing a matching contribution. The Social Security deduction is also capped, with the ceiling of the cap periodically changing. If the cap is set at $100,000 United States dollars (USD), for example, people making $100,000 (USD) or less pay Social Security on all of their income, but people making more than $100,000 USD only pay Social Security on the first $100,000 USD on their income.

People who are self employed are also expected to pay into Social Security, paying 15.3% of their income. However, the Internal Revenue Service recognizes that this can be a hardship for self employed individuals, so people are allowed to take a tax deduction. Part of their Social Security income is deducted from their taxable income, reducing tax liability. Employers may also be allowed to deduct contributions made to Social Security on behalf of employees.

For self employed individuals and independent contractors, the Social Security deduction can get extremely complicated. It is a good idea to consult an accountant to confirm that it is done correctly, and to avoid overpayments of taxes. Some people prefer to have their taxes handled entirely by an accountant, under the assumption that the account's fee is worth the savings which can be generated when taxes are prepared professionally by someone who is familiar with the ins and outs of the tax code.

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Advocates of Social Security point out that when the system is well administered, payments from people currently working fund the payouts to people who are entitled to Social Security benefits, and that the government can also invest payments to generate more Social Security funds. Critics suggest that the system is often not well administered, exposing taxpayers to losses, and that people might benefit from being allowed to opt out of Social Security, not taking a Social Security deduction and being responsible for saving funds on their own to use for retirement or a source of income in case of disability.

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