 In this presentation, we will take a look at Social Security and Social Security calculations. So here we're considering what will be the calculations for Social Security. Now remember that some of these numbers, we're going to give the numbers on in terms of what the Social Security is at the point in time. But note that the percentages are not as important right now for our purposes. What we want to know is what's the structure of this tax, how is it set up, and then we can look up the percentages at any given time. Now Social Security percent shouldn't change all that often, but they could be they could be subject to change. But once we learn the type of tax, we can apply that anywhere. The reason Social Security will not change as much is that it does take an act of new law to change the Social Security. Whereas when we think about the tax tables for the federal income tax, those are typically going to be updated often with the cost of living type of updates. So those could be could be adjusted more often than something like a Social Security tax rate. Remember that when we think of Social Security, we can think of it as a component of the FICA taxes, which is the Federal Insurance Contribution Act, which has basically two components which can be brought out or termed Social Security and Medicare. The Social Security component, the component we're looking at now, can also be called the old age survivors and disability insurance. So note, if you see the terminology, it'll also be shorthand for because it's often shorter to write OASDI in a worksheet. So it's important to know some of these kind of shorthands to write things and how things are going to be expressed so we know what we're talking about when we see both the worksheet and talk about things. So when we say FICA is usually shorthand for Federal Insurance Contribution Act, that really has two components, and usually when people are speaking about it, they're going to be speaking about it in terms of the two components of Social Security and Medicare. Those are going to be the easiest way to say things verbally. When we put something into a worksheet, however, the easiest thing to say in terms of the Social Security component, because Social Security is easier to say than OASDI, which is a hard acronym to remember, or to say the old age survivors and disability insurance act, which is not a difficulty thing to say. So we typically say Social Security. When we put it into a worksheet though, the Social Security isn't the shortest way we can say it. We can use the acronym of OASDI. So oftentimes you're going to see it in this format when we put it into our worksheet. So just note it's going to be the Social Security component of the FICA taxes. So we've got the breakout when we look at this calculation, and the most confusing thing about Social Security is that we have an employer and an employee portion, and they're the same rates. And that really is a bit confusing when we do the calculations to most people. It's not that difficult. It's just confusing to look at that because we start to confuse the two rates together. So in other words, the employer is responsible to pay 6.2% of the employee wages, and the employee is responsible to pay 6.2% of their wages. Now there is a cap to, and that's going to be currently at $127,200. This could change over times with cost of living and inflation type of adjustments. So we just need to know what the theory is on the cap so that we make sure we can look that up and apply the proper cap. So first let's talk about these two components here. The law is basically said, you can think of it kind of like a 401k type of contribution plan, although the withholding is different than a retirement plan in the way things are withheld. But with the withholding of the payments, the employer, you can think of it kind of like a matching. The employee is required to put in 6.2% into social security. And again, it's not being held by the government like a 401k plan. It's a different type of setup in terms of the payout and how that works and how the funds are held. But in terms of paying into it, they're required to pay 6.2%. And then the employer is required to in essence kind of match that pay 6.2% from the employer funds as well. So when we consider the calculation then, this portion, the 6.2 for the employee, is coming out of the gross pay. So when we think of the payroll tax calculation or the net pay calculation for an employee, how much are they going to get from a paycheck? We're going to take their gross pay minus 6.2% or 0.062, if we convert this to a decimal, out of their paycheck to as one of the components to arrive at net pay. So from an employer perspective then, this isn't really a payroll tax to the employer. It's just us breaking out the employee's payment between one person they owe, meaning we're going to give the employee the net check. We're going to take this part out of their check and pay it to people they owe, which is in essence the government. So this is a payroll tax to the employee, but it's not really a payroll tax to the employer as is this part. This part, the 6.2 for the employer is in essence a payroll tax. The calculation will be the same, meaning it's not based on the employer's income, it's based on the employee's income, and the employer has to pay 6.2% or 0.062 of their income to the government. The reason this is more of an employer tax is because we're not going to include this as a deduction from the employee's wages to get to the net income. This is going to be coming out of the employer's checking account. It's not something that we're going to say, hey, this is your wages and we took out your taxes paid by your wages and paid it out for you. It's a tax that's over and above what we're paying in terms of wages that we have to pay or the employer has to pay. So because they're the same, they often get confused as if they're the same thing. Notice if the true tax that's going to be paid is 12.4% here is what's really being paid. So then we have the cap here, and this is another area that can cause confusion and can cause debate as to what the cap should do. This cap generally goes up over time, and the reason it's there, like basically what happens is if you get above this cap, then you stop paying the taxes on it, which seems counterintuitive to most people. So basically if I pay 6.2%, the employer pays 6.2% up to the cap, in this case, at this time 127,200. I think it's actually 128,400 in 2000. I think these are 2017, but in any case, the cap, the amount doesn't matter as much as, again, as long as we know the concept, we'll look up the whatever the current cap is, and the cap does go up over time, whereas these percentages will typically be more constant over time. So you'd pay the 6.2 up to that cap, and then you don't pay anymore, which seems counterintuitive because you would think normally, federal income taxes, you pay more taxes as you get more income, meaning you would think they would pay, if you made more income, you'd pay over 6.2%. That's what a progressive system would do. So there's a couple reasons for that here, and one is that this system is the type of system where we're paying into a system that's going to give back benefits at retirement age. In other words, the more we pay in, the more we earn, 6.2% of whatever we earn goes up, means we're going to pay more taxes, the more we earn up to this cap, and so we're paying more and more whatever we earn. The benefits that we get at retirement will coincide to that in some way, meaning the people that put more money into the system typically are going to get more benefits back. Now the way the benefits work is it kind of inverse, meaning the way that calculation is the first few dollars that are put in, you get a bigger benefit, you get more money back, and then for each new contribution up to the 127, you still get some benefit. You'll get a bigger social security check back because you put more in throughout the life of the program, but it'll be incrementally smaller. And then once you get up to like 127, this is just a very limited recap of these calculations as to the reason why a cap might be there. Once you get up to a certain point, let's say it's 127, 200 of income, putting more money in isn't giving you any more benefit at the retirement to get the benefits back at all, and that's the point where we say where the cap, that's one area or one factor into coming up with the cap component. Where should the cap be? How high should the cap be? Well, once there's no benefit in terms of receiving benefits at retirement is one factor to determine how high the cap is. Now obviously there's a lot of debate on the cap because if the Social Security Fund is not funded one way, or is in trouble in some way, one way to collect more funds is to increase the cap and then that would put a higher tax on wealthier individuals to put more money into the Social Security. So anyways, the cap is something that can cause confusion, but in essence it's a flat tax, really easy to calculate unless you hit the cap and then you got to know when you hit the cap. It's not hard to calculate the cap when you're talking about gross wages, like if someone made 200,000 then obviously they'd only pay taxes on 127,200, but the thing that's difficult with Social Security is that we have to know when they hit that cap because we're paying people weekly, bi-weekly, monthly and they're gonna, if they hit that cap in the middle of October, then if we don't recognize the fact that we paid someone, you know let's say $10,000 for this pay period in October and we didn't recognize the fact that they went over the cap then we're gonna end up paying more Social Security than they owe because we're gonna pay more than the cap of 127,200 and if that happens that it's a problem with Social Security in a way that it's not as much a problem with federal income tax because Social Security is not gonna be refunded after we do the 1040 at the end of the year. Any over withholding on the 1040 will be paid back after the 1040 calculation for federal income taxes. With Social Security it's a problem because that's typically not gonna be the case and we will typically have to amend that problem so if we find that out at the end of the year when we do our reconciliation process and we say oh man we took out more than the cap amount for this high income individual because we didn't realize they hit the cap then um you gotta make an adjustment for that typically.