Most people who work or are self-employed are subject to Social Security taxes. This is true, regardless of age. Employers are also subject to Social Security taxes for their employees. If you are self-employed, and your business’ net profit is greater than $400, you must also pay Social Security (and Medicare) taxes. Self employed workers have to pay both the employee and employer portion of Social Security taxes.
For 2012, the maximum taxable earnings amount for Social Security is $110,100 (vs $106,800 in 2011). The Social Security tax (OASDI) rate is 4.2 percent for employees and 6.2 percent for employers. For self-employed individuals, the Social Security tax rate is 10.4 percent (since they are liable for both portions) The employee Social Security tax rate of 4.2 percent is only temporary and will return to 6.2 percent in 2012 unless a proposed extension is approved.
For Medicare’s Hospital Insurance program, there is no limitation on taxable earnings. Tax rates under the Medicare program are 1.45 percent for employees and employers and 2.90 percent for self-employed persons.
If you change jobs during the year, you may end up overpaying your Social Security taxes because they are calculated by your employer on an annualized basis. That is, it assumes the same salary, at the same employer for one year. You can claim a refund of the over payment when you file your taxes for that year.
Since Social Security is deducted on a pre-income tax basis you will need to pay federal taxes on your Social Security benefits when you retire and your total income is more than $25,000 ($32,000 for joint returns). States and local authorities do not normally tax Social Security benefits.
Official Source: Social Security Administration