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This is a question regarding the social insurance tax in the U.S.

The effective payroll tax cited by the Congressional Budget Office as well as the Tax Policy Center is lower than I would expect for a middle class American.

As I understand it, the tax rate is 6.2% for Social Security and 1.45% for Medicare. The employer has to match this so the total tax is 15.3%. (With self-employed workers paying the entire amount themselves.)

However if you look at the tables in the links below, you can see the effective social insurance tax never hits even 11%. Both the CBO and the TPC include the employer contribution (otherwise the number should never go above 6.2% + 1.45% = 7.65% either).

What's going on? As I understand it, the standard deduction and so forth does not apply. The payroll taxes apply directly to your gross income, not adjusted gross income, so I would think the effective tax is 15.3% for those earning less than the Social Security Wage Base ($113,700 in 2013.)

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    Re: "Both the CBO and the TPC include the employer contribution" Are you sure? The chart in the CBO publication, to me, looks like the Social Security contributions never exceed ~7-8% .. and in the chart preamble they refer to the "households’ federal tax liabilities divided by their income", and I would interpret "household liability" to mean excluding the employer portion. Finally, many households (retirees especially) have non-earned income not subject to FICA payroll taxes. e.g. pension income, Social Security income, investment income.
    – Chris W. Rea
    Jun 18, 2013 at 14:50
  • Thanks for the correction. I meant employer. Yes, I'm sure. It hits nearly 11% in some cases. That's impossible without the employer contribution. I'll see if I can find the paragraph stating it. But it makes sense. If you work for yourself you have to pay the full amount so their would be an asymmetry: about 15% for those that work for themselves and 7.5% otherwise.
    – user10366
    Jun 18, 2013 at 14:54
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    Re: "hits nearly 11% in some cases." I don't see the beige line on the CBO's "Average Federal Tax Rates, 1979 to 2009" first chart ("For All Households, by Tax Source") even getting close to the 10% level. I used an on-screen ruler to extend the 10% line across. Is there source data you're looking at?
    – Chris W. Rea
    Jun 18, 2013 at 14:56
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    The downvoter probably doesn't see the relevance of this question to personal finance, but I'm permitting it because you're asking for clarification about a tax that almost every working American sees on their paycheck. As long as we stick to interpreting the numbers presented and don't debate government tax policy, the question is OK.
    – Chris W. Rea
    Jun 18, 2013 at 15:07
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    I have no interest in debating government tax policy. I just want to know the facts.
    – user10366
    Jun 18, 2013 at 15:09

3 Answers 3

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The FICA payroll taxes of 15.3% (employee 6.2% + 1.45%, and employer 6.2% + 1.45%) apply to earned employment or self-employment income. That is, income you realize from working.

There are many additional sources of personal income, such as:

  • company pension plan income,
  • Social Security retirement income,
  • investment income (capital gains, dividends, interest), and
  • disability insurance benefits.

None of those kinds of income are subject to FICA payroll taxes (and there are tens of millions receiving Social Security), although this is changing a bit with introduction of the unearned income Medicare contribution tax.

Also worth mentioning: The Social Security / retirement portion of FICA taxes aren't levied on "wages received by certain state or local government workers participating in their employers' alternative retirement system" (Wikipedia source).

For instance, I'm aware that certain school districts in the U.S. provide a "FICA Alternative" retirement plan, with retirement benefits that replace (likely augmenting) what would've been provided by Social Security. If these kinds of plans are common in the public sector (I'm not aware of how common they are), that could account for a good chunk of the difference. I'd expect that payroll contributions directly to a FICA Alternative plan trustee wouldn't be counted as a payroll tax paid to the federal government.

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    I worked for a state university in California. We had the FICA Alternative retirement plan which replaced Social Security (but not the medicare tax).
    – user10366
    Jun 18, 2013 at 15:31
  • These are the best reasons I have read so far to why the number is not 15%. I'm still surprised it's hovering around 7-8% though. That's about half of the max.
    – user10366
    Jun 18, 2013 at 15:33
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    @raxman add to that capital gains/passive income not subject to this tax, and annual income cap for social security above which you only pay medicare even for earned income.
    – littleadv
    Jun 18, 2013 at 15:50
  • @littleadv I'm interested in the numbers below the cap, e.g. in quintiles 2 and 3.
    – user10366
    Jun 18, 2013 at 17:06
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Not sure if this was mentioned, but only the first $118,500 of income is taxed for SSI/Medicare. So the effective rate would be less for those making more than that.

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Social Security and medicare taxes are not based on the Gross wages but instead they are based on a lower figure. They deduct from the gross: pre-tax medical premiums (medical,dental,vision), Heath Savings accounts.

Therefore if an employee has any of these programs that will decrease the apparent tax rate.

Take your most recent pay stub and check it your self. Also the W-2 you get each year shows social security wages as a separate box.

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    That's a good point. I was not aware of that. I'll read up on that.
    – user10366
    Jun 18, 2013 at 15:29

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