Social Security Taxes

Posted by PITHOCRATES - January 14th, 2013

Economics 101

The Employer has to Write the Check to pay the Full Amount of Social Security Taxes

Social Security taxes are one of the biggest expenses businesses have.  If you look at your paycheck you will see some withholding taxes.  Included in those taxes you will see Social Security.  Or FICA (which includes both Social Security and Medicare withholding taxes).  These are your contributions for your retirement.  But you don’t pay them.

The Social Security contribution is ostensibly split into two parts.  There’s the employee contribution (those taxes withheld from your paycheck).  And the employer’s matching contribution.  But the employer pays the whole thing.  Just like employers pay for unemployment taxes, workers’ compensation insurance, disability insurance, health insurance (for the most part, some employees contribute a portion these days), life insurance, paid vacation, paid holidays, paid sick days and pension contributions (for those who still pay pensions).  All of these benefit the employee, not the employer.  Yet the employer picks up the tab for these expenses.  And Social Security is no different.

Actually, there is one difference.  All of these employer-paid expenses reduce the employer’s taxable income.  Except one.  The employee’s Social Security contribution.  The employer has to write the check to pay the full amount of these taxes.  Paying the full amount (both employer’s and employee’s contribution) reduces the amount of cash they have on hand to pay their other bills.  The full amount of these Social Security taxes influence hiring decisions.  And once they pay these taxes it’s income they’ve earned they no longer have.  But they still pay income taxes on it.  Despite the employee paying income taxes on this same income.

One of the Largest Expenses a Business has is Social Security Taxes

So the employee does not pay Social Security taxes.  It’s just another on a long list of expenses an employer has to pay.  That said the employee’s contribution does reduce his or her net pay.  When President Obama cut the employee’s Social Security tax rate 2% the employee’s net pay increased.  While the employer matching portion remained at the same rate.  Yet the check the employer wrote for Social Security taxes reflected this 2% reduction.  Because the employer pays all of these payroll taxes whether it’s unemployment, workers’ compensation or Social Security.  The following chart summarizes sample labor costs.  Both at the Obama tax cut.  And after it expired.  For an employee with a gross annual pay of $66,360 (for 47.4 weeks of work plus 4.6 weeks paid time off).

Note the 2nd largest cost after health care is Social Security.  Both the employer’s and employee’s portion add up to $9,027 (both at 6.2%).  Which is a lot of money.  If an employer has 15 employees that Social Security check they have to write totals $135,408.  Half of which does NOT reduce an employer’s taxable income.  Assuming an effective tax rate of 26% (for a small business owner filing as a subchapter S or an LLC where their business earnings flow through to their personal tax returns) that’s an additional $17,603.04 ($4,514 X 15 X 26%) of taxes the employer has to pay on income that they receive no benefit from.

Under the Obama tax cut this employee had $1,456 less withheld from his or her paycheck.  Or $52 less a week.  Or $5.60 less a workday.  Almost enough to pay for lunch.  Or enough to make you stop going out to lunch.  For the 15 employees that’s $780 pulled out of the local economy each week.  For a city with 500,000 workers that’s $26,000,000 pulled out of the city economy each week.  That’s a lot of economic activity.  That can provide a lot of jobs.  So why let the Obama tax cut expire when they have such a positive effect on the economy?

Social Security is Going Bankrupt thanks to an Aging Population

Because Social Security is going bankrupt.  And the solvency of Social Security isn’t helped when you cut the only funding mechanism for it.  The Social Security tax.  That 2% reduction in the tax rate cost the retirees some $176 billion each year.  That’s why they let the Obama tax cut expire.  $176 billion is a lot of money for a program going bankrupt.  And it’s a lot of money for a government that runs a deficit.  Which is the real reason why they wanted to let the Obama tax cut expire.

When the government needs to pay for their deficit spending the Social Security Trust Fund is just too tempting to pass up.  All those payroll taxes flowing into the Social Security Trust Fund.  Just sitting there.  Not being spent.  It’s just too much for a politician to resist.  So they raid the Trust Fund. They take that cash and spend it.  Leaving behind a bunch of IOUs.  Treasury bonds.  The kind that can’t be bought or sold.  Non-negotiable.  Which means the only way to redeem these bonds (and to repay the Social Security Trust Fund) is by raising taxes, further borrowing or reducing benefits.  Such as raising the age when you can start collecting Social Security benefits.  All of which we’ve used to try to forestall the inevitably bankruptcy of Social Security.

So Social Security is a very complex thing.  Social Security taxes are a tremendous cost burden on businesses.  And they pull a lot of spending money out of the economy.  Reducing economic activity.  Yet as much money as they pull out of the economy it’s not enough.  Social Security is still going bankrupt.  Thanks to an aging population (the number of beneficiaries is growing at a greater rate than those entering the workforce to pay for these benefits).  And even though the rate of money flowing into the Social Security Trust Fund is falling it’s still large enough for politicians to raid to pay for other out of control spending obligations.  Ensuring that Social Security will go bankrupt no matter what tax rates are.

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