What is the Social Security Tax?

The social security tax is collected in the form of either a self-employment tax or a payroll tax that is levied both on the employees and employers to fund the Social Security Program. Social Security tax pays for disability, widowers, widows, survivorship benefits and retirement received by millions of people in USA, Canada, and Europe. Social Security Tax is a contribution towards your coverage under the social security system.

About Social Security Tax in the USA

The Social Security Tax is a part of FICA tax. The other part is Medicare taxes. Whether or not you expect to qualify for Medicare or social security benefits your employer is supposed to deduct these taxes. Self-employed people don’t have to pay a Social Security Tax. They pay Self-employment Tax. Self-employment Tax is almost like paying both the employee and employer’s FICA tax portions.

Whether or not you are a citizen or a resident of US, the US Medicare taxes and social security taxes apply to the payments of wages for services you perform as an employee working in the US. In some situations, Social Security Tax and Medicare Tax is applicable for wages received for services executed outside the United States. In every case, employer’s will always be able to tell you whether these taxes are applicable to your wages. In no situation can you make any voluntary social security payments if there are no taxes due. Social Security Tax is also referred to as OASDI- Old Age, Survivors, a Disability Insurance.

Not all taxpayers have to pay social security tax. Some of the individuals those are exempt from social security tax are as follows:

  • Students that are employed by the same school they have enrolled in and where employment is dependent on continued enrollment.
  • Non-resident aliens who work in the US for a foreign government.
  • Non-resident individuals, and aliens who are not legal residents of the United States and who are in in the country as students temporarily. They are also not citizens of the US.
  • Individuals who are members of a religious group and who are opposed t the idea of receiving Social Security benefits if disabled, after death and during retirement

The current rate of social security tax in the USA is 6.2% for the employee and 6.2% for the employer and a 12.4% in total. The Medicare tax rate is 1.45% for employer and 1.45% for employee, which is a total of 2.9% total. For individuals who are self-employed, the self-employment tax is 15.3%. In the US.

Common Social Security Benefits offered by USA, Canada, and Europe

Even though social security tax and contribution laws vary between USA, Canada, and Europe, the definition of social security tax and benefits are more or less the same worldwide.
Social security contributions are mandatory payments paid to the government to receive a future social benefit. The benefits may include all or any of the following benefits.

  • Family allowances
  • Old age benefits
  • Sickness and Maternity benefits
  • Unemployment insurance benefits and supplements
  • Sickness, accidents and injury benefits
  • Reimbursements of hospital expenses and medical expenses
  • Provision for medical and hospital services
  • Child benefits
  • Child tax benefits

Whether you are looking at the USA, Canada or European nations, these contributions are made both by employers and employees. However, the rates may vary.

Totalization agreement between USA and Canada

This agreement has been effective from 1st August 1984. Before this agreement, the employers, employees and self-employed persons under certain circumstances had to pay Social Security Tax to both Canada and the USA for the same work. This agreement eliminates this problem.
As per this agreement if you are working as an employee in Canada, then you are covered by Canada, and your employer and you will pay Social Security Tax only to Canada. If you are an employee in the USA then your employer and you will pay social security tax to the USA government and you are covered in the USA.

If your employer sends you to the country to work for him or an affiliate in that country for a period of 5 years or less, then you continue to be covered in your home country and are exempt from coverage in the other country. If you are sent for more than a period of 5 years, then you get coverage and pay contributions to that country.

If you are self-employed, then your residential status decides where you get coverage and where you pay your contributions.

European Social Security Coordination

Each of the European countries has its own separate social security laws. All the European countries can decide which benefits they want to grant under what terms and conditions and who is to be insured under their legislation. Europe rules national coordinate systems to ensure that people who move from one European nation to another do not lose their social security cover. As per EU rules, there are four main principles when it comes to Social security tax laws. They are as follows:

  • One person can be subject to only one country’s social security tax laws at a time. Hence the social security contributions are to be made in the same country only. The decision of which legislation applies to you is up to the social security institutions.
  • When you claim a benefit of your residence and work in other countries, and previous periods of insurance may be taken into consideration if deemed necessary.
  • If anyone is entitled to any cash benefit in one country, then that person shall receive the same even if he/she is living in a different country. This principle is also referred to as the principle of exportability.
  • Everyone has the same rights and obligations as nationals in the country where you are covered. This principle is termed as the principle of equal treatment or non-discrimination.

The current rate of Social Security Tax Rate for employees in different counties in 2018 (Canada and Europe)

Some of the social security tax rates levied on employees in Canada, and different European nations in 2018 are mentioned below for your reference.

  • Canada-6.58%
  • United Kingdom- 12%, 13.8%
  • Portugal -11%
  • France-14.20%
  • Hungary- 18.50%
  • Czech Republic- 6.5%
  • Romania-35%
  • Slovenia-22.10%
  • Slovakia- 13.40%
  • Germany-20.78%
  • Spain-6.35%
  • Italy-9.49%
  • Switzerland-6.23%
  • Belgium-13.07%
  • Bulgaria-13.34%
  • Luxembourg-12.45%
  • Greece-16%
  • Netherlands-27.65%
  • Montenegro- 24%
  • Poland- 13.71%
  • Sweden-7%
  • Austria-18.12%
  • Turkey-15%
  • Iceland-4%
  • Denmark-8%
  • Norway-8.20%
  • Malta-10%
  • Bulgaria-13.34%
  • Finland-9.33%
  • Serbia-19.90%
  • Cyprus-7.80%
  • Albania-9.50%
  • Croatia- 20%
  • Latvia-11%
  • Lithuania-11%

Source: tradingeconomics.com

Businessman’s Perspective

If you are a businessman, it is imperative to know the social security tax laws of the country where you wish to set up your company’s base. This knowledge will help you save a fortune. As a businessman, the objective is always maximum profitability. Hence it is always beneficial to do your homework adequately.
When you are in the deciding phase and wondering where to set up the base of your company, there are some aspects that you must take into consideration.

You must access the labor cost of the country that you are looking at. Ideally, if labor cost is comparatively and substantially low then even if that country levies a little higher tax then you must select that country as a base because of labor affordability. Another important side that you need to consider is accessibility.

You must also skillfully calculate the tax burden that a country will push towards you. You must calculate the social security tax that you have to pay, the cost of hiring people, and their productivity. While considering a particular country, you should also have a fair understanding of the government’s attitude and dynamics and access whether it is good for your business or not.

A clean comparative analysis before deciding on a base for your company can help save a fortune and leverage the business environment of the aptest location concerning social security taxes and labor cost.

Whether you are an employer or you are an employee, it is important to understand and have knowledge of the social security taxes that you pay and the benefits that your country’s social security system covers. Knowing where your money goes and how can it help you is mandatory to utilize your resources to combat common adverse and difficult situation and only adds to your financial wisdom.

Categories: Taxes

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