Is Social Security Tax Included in Federal Tax?

Many people often wonder about the distinction between federal income tax and Social Security tax. Despite both being federal obligations, they serve different purposes and operate under separate rules. This article clarifies the differences between these two types of federal taxes, explaining how each is structured and collected.

Federal Income Tax Explained

Federal income tax is a levy imposed by the U.S. government on an individual’s or entity’s taxable income, serving as the largest source of revenue for the federal government. This revenue funds a wide array of government operations, programs, and services, including defense, education, infrastructure, and public health initiatives. The U.S. income tax system is progressive, meaning that higher levels of taxable income are generally subject to higher tax rates.

Taxable income is determined by taking an individual’s gross income and subtracting eligible deductions and exemptions. Gross income includes various earnings such as wages, salaries, investment income, and certain other forms of compensation. Tax rates are organized into different brackets, with each bracket applying a specific percentage to portions of income that fall within its range, depending on the taxpayer’s filing status.

For most employed individuals, federal income tax is collected throughout the year through tax withholding. Employers withhold an estimated amount from each paycheck based on information provided by the employee. This withholding ensures taxpayers meet their annual tax obligations and avoid a significant tax bill or penalties.

Social Security Tax Explained

Social Security tax is a specific federal payroll tax designated to fund the Social Security program, which provides benefits for retirees, individuals with disabilities, and survivors of deceased workers. This tax is a component of the Federal Insurance Contributions Act (FICA) taxes, which also include Medicare tax. FICA taxes are a mandatory contribution shared between employees and employers.

For employees, the Social Security tax rate is 6.2% of their gross wages, with employers contributing an additional matching 6.2%. This results in a total contribution of 12.4%. A distinctive feature is the annual wage base limit, which caps the amount of earnings subject to this tax each year. For instance, earnings above a certain amount are not subject to further Social Security tax.

Self-employed individuals pay both the employee and employer portions of FICA tax. This combined self-employment tax rate applies to net earnings from self-employment, covering both Social Security and Medicare. Self-employed individuals typically pay these taxes through estimated tax payments throughout the year.

How These Taxes Differ and Are Collected

Federal income tax and Social Security tax are distinct and separate obligations, not one included within the other. They differ fundamentally in purpose, calculation methods, and application. Federal income tax is a broad tax on various forms of income for general government funding, while Social Security tax is a specific payroll tax dedicated solely to funding the Social Security program.

For employed individuals, both taxes are collected through payroll withholding. They appear as separate line items on pay stubs and on Form W-2, the annual Wage and Tax Statement. Form W-2 clearly separates the federal income tax withheld from the Social Security tax withheld.

Self-employed individuals manage both their federal income tax and Social Security (and Medicare) tax obligations through quarterly estimated tax payments. These payments encompass both their income tax liability and their self-employment tax, which covers Social Security and Medicare.