How to Pay Into Social Security: A Step-by-Step Overview
Learn how Social Security contributions work, who needs to pay, and the steps for accurate reporting to ensure compliance with tax requirements.
Social Security is a key part of the U.S. retirement and disability system, funded by payroll taxes from workers and employers. These contributions ensure financial support for retirees, disabled individuals, and surviving family members. Understanding how to pay into Social Security correctly is essential to avoid penalties and secure future benefits.
This guide outlines how Social Security payments work for employees, employers, and self-employed individuals.
Who Must Pay
Most U.S. workers must contribute to Social Security, but specific rules determine who is subject to these taxes. U.S. citizens and lawful permanent residents working for an employer in the country must pay Social Security taxes if their earnings exceed the annual minimum threshold set by the Social Security Administration (SSA). In 2024, this threshold is $400 for self-employed individuals and $2,400 for household employees.
Nonresident aliens working in the U.S. may also be subject to Social Security taxes unless exempt under a totalization agreement, which prevents double taxation for individuals who have worked in both the U.S. and another country.
Certain groups are exempt. Federal employees hired before 1984 may be covered under the Civil Service Retirement System (CSRS) instead. Some state and local government workers are also exempt if they participate in a public retirement system. Members of certain religious groups that oppose public insurance programs can apply for an exemption by filing IRS Form 4029, provided they meet strict eligibility criteria.
Employee and Employer Contributions
Social Security taxes are automatically deducted from an employee’s paycheck, with both the worker and employer contributing. The Federal Insurance Contributions Act (FICA) requires a 6.2% Social Security tax on wages up to the annual wage base limit, which is $168,600 in 2024. Employers match this contribution, effectively doubling the total amount paid into the system.
Employers must withhold and report these taxes on IRS Form 941, the Employer’s Quarterly Federal Tax Return. Businesses deposit these taxes either semiweekly or monthly, depending on their total payroll tax liability. Employers who fail to withhold or remit the required amounts can face penalties under the IRS Trust Fund Recovery Penalty, which holds responsible parties personally liable for unpaid taxes.
Employees earning bonuses or commissions will have Social Security tax applied to those earnings as long as their total wages remain below the taxable wage cap. Workers with multiple jobs may have excess Social Security tax withheld if their combined earnings exceed the wage base limit. They can claim a refund for the overpaid amount when filing their annual tax return.
Self-Employment Requirements
Self-employed individuals pay Social Security taxes differently than traditional employees. Instead of payroll deductions, they contribute through the Self-Employment Contributions Act (SECA), which requires a 12.4% tax on net earnings up to the annual taxable income cap. Since there is no employer to share the cost, self-employed individuals pay both the employee and employer portions.
The self-employment tax also includes a 2.9% Medicare tax. Those with net earnings exceeding $200,000 (or $250,000 for married couples filing jointly) must pay an additional 0.9% Medicare surtax. To manage these obligations, self-employed individuals make estimated tax payments quarterly using IRS Form 1040-ES.
Net earnings for Social Security tax purposes are calculated by deducting business expenses from gross income. The IRS allows self-employed workers to deduct half of the self-employment tax when calculating their adjusted gross income (AGI). This deduction helps offset the burden of paying both portions of Social Security tax and is reported on Schedule SE, which accompanies Form 1040.
Calculating Taxable Earnings
Wages, salaries, bonuses, and certain fringe benefits count toward the taxable wage base, but not all forms of income are subject to Social Security taxes. Employer contributions to retirement plans, such as 401(k) matching contributions, are not included in Social Security wages, but employee elective deferrals are.
Stock options also impact taxable earnings. When an employee exercises a nonqualified stock option (NSO), the difference between the fair market value of the stock and the exercise price is considered taxable compensation and subject to Social Security tax, provided total earnings remain below the wage base limit. Incentive stock options (ISOs), however, do not trigger payroll taxes at the time of exercise but may have tax implications under the alternative minimum tax (AMT).
Deferred compensation agreements can also affect taxable earnings. Under Section 3121(v)(2) of the Internal Revenue Code, deferred compensation is subject to Social Security tax when services are performed rather than when the compensation is paid, unless the plan qualifies for specific exemptions. Executives with substantial deferred earnings could owe Social Security taxes on income they have not yet received.
Payment and Filing Procedures
Employees have their Social Security taxes automatically withheld by their employer, but businesses must ensure timely deposits to the IRS. Employers use the Electronic Federal Tax Payment System (EFTPS) to submit payroll taxes, following either a monthly or semiweekly deposit schedule based on their total tax liability. Late deposits can result in penalties ranging from 2% to 15% of the unpaid amount, depending on the delay.
Self-employed individuals must make estimated tax payments quarterly using IRS Form 1040-ES. These payments cover Social Security, Medicare, and income taxes. Failure to make sufficient estimated payments can lead to underpayment penalties, calculated based on the IRS underpayment interest rate, which fluctuates quarterly. To avoid penalties, self-employed individuals often use prior-year tax liability as a benchmark or follow the IRS safe harbor rule, which requires paying at least 90% of the current year’s tax or 100% of the previous year’s tax, whichever is lower.
Penalties for Nonpayment or Underpayment
Failing to pay Social Security taxes or underreporting taxable earnings can result in financial penalties. The IRS enforces strict rules to ensure compliance.
Employers who fail to withhold or remit Social Security taxes may face the Trust Fund Recovery Penalty (TFRP), which holds business owners, corporate officers, or payroll managers personally liable for unpaid payroll taxes. The penalty equals 100% of the unpaid tax amount. Employers who misclassify workers as independent contractors to avoid payroll taxes may face reclassification audits, back taxes, and penalties under IRS Section 3509.
Self-employed individuals who fail to make estimated tax payments or underpay their self-employment tax may be subject to an underpayment penalty, calculated based on the IRS interest rate for unpaid taxes. If taxes remain unpaid beyond the filing deadline, additional failure-to-pay penalties accrue at 0.5% per month, up to a maximum of 25% of the unpaid amount. Persistent noncompliance can lead to tax liens or levies, allowing the IRS to seize assets to recover unpaid liabilities.