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The government deducts Social Security tax from income earned by both self-employed and company-employed workers. Self-employed workers must apply this tax to their earnings when filing federal and state income taxes, while employers withhold Social Security tax from their employees' paychecks automatically. This tax is used to pay benefits to people who have retired and are eligible to receive Social Security benefits, as well as benefits to disabled individuals, widowed individuals, and children with deceased parents. Currently, annual incomes exceeding $127,000 are not subject to Social Security tax.

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History of Social Security

In 1935, President Franklin D. Roosevelt established what is now the Social Security Administration. Originally called the Social Security Act, this program was part of Roosevelt's New Deal program meant to help pull the U.S. out of the Great Depression and further assist poor, unemployed, and older individuals. FDR was the first president to support government assistance for people over 65. The original Social Security Act also included Aid to Families with Dependent Children and a variety of public health services.

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What is a Regressive Tax?

Social Security taxes are regressive taxes, meaning lower earners have larger portions of total withheld income than higher earners. For example, person X, who earns $175,000 annually, pays about $7,885 in Social Security tax, approximately 4.5 percent. Person Y earns $85,000 annually, so their tax rate is about 6 percent. People with incomes low enough to be exempt from federal income taxes will still have Social Security deductions.

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Are There Exemptions to Social Security Tax?

Yes. Exemptions include religious group members who oppose receiving SSA benefits after retiring or suffering a disability. Nonresident aliens who are not legal residents or citizens of the U.S., or work in the U.S. for foreign governments, do not pay Social Security tax. Finally, students employed at the same college or university at which they are enrolled and must remain employed to continue their enrollment are exempt from paying Social Security tax.

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Self-Employed Individuals and Social Security Tax

Since the IRS considers self-employed individuals both employee and employer, self-employed people are expected to pay 12.4 percent or the full Social Security rate (both employer and employee amounts). This tax rate applies to net earnings up to the current wage limit. Additionally, self-employment taxes are comprised of the Medicare tax and the Social Security tax. Unless self-employed individuals take Social Security tax out of their earnings, they may not accumulate enough credits to be eligible for retirement benefits when it comes time for them to apply.

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Social Security Tax Provides for Progressive Benefits

Progressive benefits are benefits representing a higher portion of an income earner's previous earnings, for employees receiving lower earnings. For example, if a lower-wage earner retires at age 65, benefits received will replace about half their prior earnings. Alternatively, benefits for high-wage earners (over $100,000) replace only about a third of their prior earnings. Once a person begins receiving Social Security benefits, the SSA increases benefits each year to match inflation rates. However, annuities and private pensions meant to help support retired individuals are typically not adjusted for inflation.

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Payroll Taxes and Social Security Tax

Since the Social Security Act became law in 1935, payroll taxes have composed over 95 percent of income supplied to Social Security programs. Medicare and Social Security taxes taken from payroll taxes are often called FICA or SECA taxes. The Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA) both continue today as significant withholdings included in payroll taxes. SECA and FICA have wage threshold restrictions or taxable maximum. Earnings above the current threshold established by the SSA are not subject to FICA or SECA taxes.

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What are Survivors Benefits?

Social Security tax pays survivors benefits to families of workers who have died and left behind children under 20 years old, and spouses. In some cases, ex-spouses and parents may also receive survivors benefits. Dependents receive between 75 and 100 percent of a deceased worker's Social Security benefit. However, the SSA limits benefit amounts paid monthly to families qualifying for survivors benefits. How much a family member receives depends on how many years the deceased worker remained employed and their earnings total at the time of their death.  

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When Can Someone Apply for Social Security Retirement Benefits?

As long as a person has paid enough Social Security tax (called credits), they can apply for benefits starting at age 61 and nine months. Full retirement age (FRA) is currently 66 years old. The SSA will pay 100 percent of benefits if someone waits until they are 66. Requesting benefits before full retirement age means you'll only get partial benefits until the person reaches FRA.

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What is a Social Security Number?

Every U.S. citizen born in the U.S receives a Social Security card with their number and name printed on the card. The number helps the SSA keep track of your earnings record to determine your benefit amounts, for disability, retirement, or survivors benefits. The government will never issue your Social Security number to another person, even after your death. The SSA provides ten free replacement cards per person. After that, you will have to pay for replacement Social Security cards, so keep of yours (it's also a personal security issue).

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Can You Change Your Social Security Number Once You Begin Paying Social Security Tax?

Yes. The SSA allows people to change numbers if applicants can prove they have cultural or religious issues with their assigned number or if identity theft is an ongoing issue. In addition, Social Security may consider number changes if someone is being tracked by their SS number and in danger or facing harassment. There are other extenuating circumstances permitting U.S. citizens to change their Social Security number at any point in their lives.

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