How the Social Security tax works

This page explains how the Social Security tax is subtracted from the total paid by the client or employer and how much you (the worker) have left. This is very simplified and ignores rate caps, benefits and other deductible expenses, unemployment and state taxes, and other complications, and it's approximate; its purpose is just to explain the basic concept.

The 7.65% Social Security tax (FICA/OASDI/MediCare) is paid by both employer and employee. Self-employed pay both halves (15.3%). This is why you need to quote a bit higher rate to get the same amount if you're an Independent Contractor (whether incorporated or self-employed).

It so happens that 7.65% is very close to 1/13, so here's an approximation.

$14

SS

Employer half = $1

RMPCS,

$14

$13

Client or

$2

Employee half = $1

1099, or

$13

$12

employer

You

W-2

corp/corp

$12

pays $14

get

RMPDP quotes $12

quotes

quotes

total cost

$12

$13

$14

If you're an employee, for every $13/hr. of your rate, the employer and employee halves of the SS tax are $1/hr. each, so your employer is paying $14/hr., and you're really getting $12/hr. But you have to pay income tax on the $13/hr.

If you're 1099 (self-employed), you need to quote $14/hr., because you have to pay both halves = $2/hr., leaving you the same $12/hr. But you get to deduct the employer half of the Self-Employment tax, or $1/hr., so again, you pay income tax on $13/hr.

If you're incorporated (or using a W-2 umbrella), it works like both of the above examples combined. Normally you're an employee of your corp., so again, you need to quote $14/hr., your corp. as employer will pay $1/hr. out of that, leaving you a $13/hr. wage as employee, you pay $1/hr. out of that, leaving you the same $12/hr. And again, you pay income tax on the same $13/hr.

If you're working through RMPDP, we bill the same $14/hr. and you get the same $12/hr. So our cost is negligible. And because we handle the $2/hr. difference instead of you, you only have to pay income tax on the remaining $12/hr., not $13/hr., so you also save on taxes. RMPCS or RMPCP will quote the $14/hr. to the client and RMPDP will quote the $12/hr. to you, or we can all say to everyone that it's equivalent to $13/hr. on a W-2, it's all the same. It's just a matter of making sure you're comparing apples to apples.

So, to summarize, the W-2 rate is quoted at $13/hr., in the middle between the two halves of SS tax. The 1099 or corp-to-corp rate is quoted at $14/hr., at the top, including both halves of SS tax. The total cost to the client would be quoted the same way. But what you really get is the $12/hr. at the bottom, excluding both halves of SS tax, and that's what RMPDP quotes you. In all 3 ways, the total cost to the client/employer is $14/hr. and you really get $12/hr. The main difference is how it's quoted.

[ How the Social Security Tax Works (old web page) ]

The link above has more detailed information from our old web site.

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